SOLID DISCOUNTS IN EMERGING MARKETS ASSETS

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Astute long-term investors are getting increasingly tired of quantitative easing (QE) or similar monetary moves from the Federal Reserve Bank, Bank of England, Bank of Japan, the European Central Bank, and the People’s Bank of China.

In an environment where assets are artificially inflated, investors have increasingly turned to gold. However, gold has now become a high-risk asset as it is being controlled by the momo crowd and not the traditional investors who bought gold as a hedge against inflation and bad news.

In such an environment, some not all, emerging markets offer attractive opportunities to investors. Compare the following characteristics of some of the emerging markets with those of developed markets:

  • Lower sovereign debt
  • Higher growth
  • Favorable demographics
  • Cheaper equities
  • Less shenanigans by central banks

Emerging markets are on a 20% off sale. Emerging markets are trading at about 20% discount in terms of price earnings ratios (P/E) compared to MSCI World Index. There is precedence that when the P/E discount is at about 20%, emerging markets tend to outperform.

Typically P/E of emerging markets is dictated by inflation rates. Over the last six months emerging markets have made dramatic progress in controlling inflation. If inflation stays under control, emerging market P/Es will start rising.

Interestingly, in our view, the biggest emerging market of all, China, does not fit the thesis. China is as much into stimulus as some developed markets. At The Arora Report we closely follow 15 emerging markets. Some of these markets offer excellent long-term opportunities now while others may provide good entry points in the very near future….Read more at MarketWatch

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