Ray Prasad, senior portfolio manager on Batterymarch’s emerging markets investment team, explains: “Stock prices often rise toward the end of the recession in expectation of a recovery, but that doesn’t necessarily mean that the market is overvalued. In fact, we believe that emerging markets are currently fairly valued to slightly undervalued. With ample liquidity in the domestic and global capital markets, we expect emerging markets to remain well supported.
“Previous market bubbles have been characterised by high valuations and price-to-book measures in excess of 5.0x. Right now we are seeing a very different situation with emerging market stocks currently trading at 2.0x price-to-book, with an expected two-year growth rate of close to 25%. These are in line with their historic valuations and still at a small discount to developed markets.”
Batterymarch believes that emerging markets are much less risky now than in the past and are fundamentally much stronger at the sovereign levels than developed countries. Unlike these countries, emerging markets have better fiscal balances, large current account surpluses and they now control most of the world’s foreign exchange reserves.
“We are also seeing more strength on a corporate basis in emerging markets. Emerging market companies have been delivering higher ROEs for years, with much less leverage than in the developed markets. Current estimates appear quite strong for 2010 and beyond. Our data shows earnings per share growth for emerging markets now stands at 24% over the next two years. All of this suggests economic staying power and an increasing number of excellent long-term opportunities.”
Batterymarch also believes the monetary tightening process in China will continue over the next 12 to 18 months and that officials are unlikely to raise interest rates in the near term. Prasad adds: “The tightening is intended to slow the country’s growth without stalling it. Since China is a major force in the economic expansion of other emerging markets growth in those markets will inevitably lose some momentum as well, although this might not be evident for another six to nine months. Regardless of these changes, emerging markets should continue to grow much faster than the developed world and stock prices should continue to benefit as corporate earnings rise.”
“Emerging markets are positioned to benefit over the long term from underlying secular growth drivers, such as infrastructure development and strengthening local demand. The correction early in 2010 has provided excellent opportunities to gain exposure to these markets.”
