Slides of the Month – February 2014

Overview: Emerging Market (EM) equities look inexpensive, but fears of capital outflows combined with depreciating currencies, high inflation rates, current account deficits, and an uncertain growth outlook have spooked investors. There are various country specific issues at work, yet general sentiment around EM’s remains very cautious. With the Federal Reserve well into its tapering process, investors are re-examining EM’s, which have been major beneficiaries of “easy money” policies over the last several years. The MSCI Emerging Markets ETF, which tracks a broad set of EM countries, is down 9.8% YTD (as of the close on 2/5/14).

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China Growth Fears Have Significant Implications for Emerging Markets

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• The latest China PMI figure of 50.5, shown on the right, was the weakest in 6 months.

• This data point is feared to be an early signal of a major growth slowdown in China and many of its EM counterparts.

• The Shanghai Composite is down more than 60% from its 2007 high, while the MSCI Emerging Markets ETF remains almost 25% off its 2007 high.

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Emerging Market Currencies Have Been Under Severe Pressure

The Turkish Lira has been a poster child for the latest EM scare and is one example of EM distress.

The Lira has fallen by about 11% vs. the US dollar since mid-December and by almost 22% since the start of 2013. Over this time period, Turkish inflation averaged ~7.5% vs. a 5% target set by the country’s central bank.

To defend its currency, Turkey aggressively raised interest rates. Other EM countries have also followed suit, but higher interest rates could stifle future growth.

Emerging Market Valuations Are Cheaper Than Developed Markets

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Emerging Market PE ratios are well below those of more developed counterparts.

• For example, Russia, Argentina, and Turkey are all trading at single digit trailing PE multiples.

• The blended valuation scores in general are very favorable for the emerging markets.

• Nonetheless, until capital flows and growth prospects stabilize, we are still cautious on investing in Emerging Markets.

Slides of the Month – Disclaimer

Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy.

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