Could Emerging Markets Stocks Be Nearing a Bottom?
Recent softness in emerging markets could signal an opportunity to pick up high-quality stocks on the cheap.
"Nobody can pick the bottom—nobody knows the very best time to get in— but if you look at the valuations, you'll see that we're now nearing in price/earnings terms, the low point in the historical averages that we've seen since 1987," Mark Mobius, Templeton Emerging Markets Group, told CNBC Wednesday. "So no harm in starting to nibble and go into these markets."
"We're moving from things that were sort of marginal in our portfolios to the higher quality names that we wanted to buy in the past that were too expensive," he added.
Like much of the developed world, capital markets in emerging markets such as Brazil and Russia have been hostage to uncertainties over Europe's debt crisis in recent weeks, with both equity and currency values softening. Brazil's benchmark Bovespa index, for instance, is down 22 percent this year, and the Brazilian real has declined 13 percent against the dollar in the past month.
"There's quite a few events in the immediate pipeline that could knock [emerging markets] back a bit—a massive breakup of the euro zone would be particularly tough on the EMEA universe but wouldn't do Asian exporters any good either," said Cameron Brandt, director of research at EPFR Global, a fund-tracking firm that follows $15 trillion in total assets globally.
Emerging markets appeared to reverse losses over the last two days on hopes that Europe is able to manage its debt problems. The MSCI Emerging Markets Index rallied 4.9 percent Tuesday, the most since May 2009, after the European Commission said European and IMF representatives would resume financial aid talks Thursday.
"I think it's a short-term thing," said Brandt. "If Europe gets its act together in a credible way, that would likely fuel a rally in most assets, and emerging markets would likely benefit."
Despite ongoing volatility in the space, Mobius, who is widely considered a leader in the emerging markets industry, remains bullish.
"Growth in emerging markets are three times faster than developed markets," he said. "Debt to (gross domestic product) is lower. Foreign reserves are much, much higher."
Mobius also pointed out that the real weighting of emerging markets globally is 32 percent, since MSCI and S&P don't account for all companies worldwide.
"Most people are very underweight," he said. "It's a good idea to increase—particularly now when the markets are weak and are down—because fundamentals are still there."
Mobius is particularly excited about India, Russia, Bangladesh, and China.
"India, longer-term is going to be very interesting," he said. "You've got a younger population than China. China's population is aging."
And despite governance issues in Russia, Mobius added, certain stocks can make sound investments.
"The Russians are very strict when it comes to following rules," he said. "You'll find that if you get the right company, you'll find that they're very, very good."
EPFR Global's Brandt echoed Mobius' sentiments—long-term.
"I support the case for emerging markets," he said. "If you have a long horizon, they're going to outperform developed markets."
But Brandt cautioned that it's not the best climate for emerging markets: "It's going to be a bumpy ride for a while. Calling a bottom right now is just pretty unlikely."
He added: "Emerging markets whichever way you look at them are not going to do as well when Europe and the US are back in recession. We came into this year on fairly rosy assumptions. Most of the adjusting of the moment is heading in the wrong direction."