Bull run fuels hunt for laggards
Bull run fuels hunt for laggards
08:29, December 08, 2009 
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Signs this year's emerging equity bull run may extend into 2010 are prompting investors who missed the rally to seek out so-called laggard trades - stocks that are still relatively cheap but may outperform in future.
Emerging equities rebounded over 5 percent last week after hefty falls fueled by fears a debt crisis in Dubai would paralyze the world financial system again. Many investors see the weakness as a chance to buy into the resurgent sector.
But to those who want to share in the emerging markets story but balk at current elevated valuations, central European and frontier stocks, as well as Western firms with exposure to developing nations, are recommended as laggards.
Emerging equities are up 75 percent in 2009, having pulled in over $50 billion this year. That makes valuations seen just earlier this year a distant memory - the MSCI emerging index trades now at 13.5 times forward earnings - almost double last October's 6.5 times, ThomsonReuters data shows.
"People are looking for catch-up trades," said Robert Ruttman, emerging equities strategist at Credit Suisse.
"For people who missed the first entry points, the question is: where are we going to see further upside? Laggard countries like South Africa, the Czech Republic and Hungary have underperformed and will probably outperform in the coming year."
The past months' rally has pushed Latin American stocks to 13.6 times one-year forward earnings versus a five-year average of 10, while non-Japan Asia trades 14.7 times 2010 earnings.
Emerging Europe, seen so far as the most vulnerable of the emerging regions, has seen stocks rise 60 percent this year compared with 105 percent in Latin America. And most of these gains were in Russia, which in recent months has drawn investors betting on higher oil demand.
Czech and Polish stocks are up 30 percent in 2009 and in dollar terms they lag further - the MSCI Czech index for instance is up only 13 percent. Many hope these markets will gain from recovery in Western Europe, especially Germany.
Czech stocks for instance, trade at under 11 times forward earnings compared with their five-year average over 13 and analysts expect a re-rating if there is a recovery in the euro zone, the destination of 85 percent of its exports.
Oliver Bell, senior investment officer at Pictet, has gone overweight on central Europe, including Hungary and Czech, for the first time in years, having trimmed back Asia and Latin America.
"Central Europe looked close to disaster a year ago but now valuations have become much more interesting and there is more confidence that if the world economy recovers these countries will be okay," Bell said.
Daniel Tubbs, fund manager at Blackrock, agrees.
"In (Poland, Hungary and Czech Republic) where we had zero exposure until recently, we now have substantial exposure. Those are few of the countries which offer considerable upside from here," Tubbs said.
His top pick is Russia where shares, despite a 120 percent rally, remain half as cheap as Asia. Russian stocks are also the top 10 2010 trades for Goldman Sachs which says it has lagged its peers in recouping last year's losses on most assets.
Other laggards may be found in the Gulf despite the debt crisis embroiling the United Arab Emirates. Tubbs highlights energy-rich Qatar, trading at 9.5 times 2010 earnings but with high oil and gas prices offering potential for gains next year.
Ruttman of Credit Suisse says one way to play the emerging markets growth story now is via firms based and listed in developed markets but with large exposure to developing nations.
A recent CS study using a basket of 30 developed stocks deriving over half their profits from emerging markets found these stocks to have performed on par with the MSCI EM in recent years but with better transparency and liquidity, Ruttman said.
The basket includes brewer Anheuser Busch, cosmetics firms Oriflame and Avon and cement firm Lafarge - expected to benefit from urbanization in the developing world.
"There are opportunities within EM ... for instance the biggest laggard market in recent months was China," said Julian Mayo, fund manager at Charlemagne Capital.
"We saw the recent pullback as an opportunity to pick up some domestic demand names," he said, noting Shanghai's 20 percent fall off August peaks before a gradually recovering.
Source: China Daily
Emerging equities rebounded over 5 percent last week after hefty falls fueled by fears a debt crisis in Dubai would paralyze the world financial system again. Many investors see the weakness as a chance to buy into the resurgent sector.
But to those who want to share in the emerging markets story but balk at current elevated valuations, central European and frontier stocks, as well as Western firms with exposure to developing nations, are recommended as laggards.
Emerging equities are up 75 percent in 2009, having pulled in over $50 billion this year. That makes valuations seen just earlier this year a distant memory - the MSCI emerging index trades now at 13.5 times forward earnings - almost double last October's 6.5 times, ThomsonReuters data shows.
"People are looking for catch-up trades," said Robert Ruttman, emerging equities strategist at Credit Suisse.
"For people who missed the first entry points, the question is: where are we going to see further upside? Laggard countries like South Africa, the Czech Republic and Hungary have underperformed and will probably outperform in the coming year."
The past months' rally has pushed Latin American stocks to 13.6 times one-year forward earnings versus a five-year average of 10, while non-Japan Asia trades 14.7 times 2010 earnings.
Emerging Europe, seen so far as the most vulnerable of the emerging regions, has seen stocks rise 60 percent this year compared with 105 percent in Latin America. And most of these gains were in Russia, which in recent months has drawn investors betting on higher oil demand.
Czech and Polish stocks are up 30 percent in 2009 and in dollar terms they lag further - the MSCI Czech index for instance is up only 13 percent. Many hope these markets will gain from recovery in Western Europe, especially Germany.
Czech stocks for instance, trade at under 11 times forward earnings compared with their five-year average over 13 and analysts expect a re-rating if there is a recovery in the euro zone, the destination of 85 percent of its exports.
Oliver Bell, senior investment officer at Pictet, has gone overweight on central Europe, including Hungary and Czech, for the first time in years, having trimmed back Asia and Latin America.
"Central Europe looked close to disaster a year ago but now valuations have become much more interesting and there is more confidence that if the world economy recovers these countries will be okay," Bell said.
Daniel Tubbs, fund manager at Blackrock, agrees.
"In (Poland, Hungary and Czech Republic) where we had zero exposure until recently, we now have substantial exposure. Those are few of the countries which offer considerable upside from here," Tubbs said.
His top pick is Russia where shares, despite a 120 percent rally, remain half as cheap as Asia. Russian stocks are also the top 10 2010 trades for Goldman Sachs which says it has lagged its peers in recouping last year's losses on most assets.
Other laggards may be found in the Gulf despite the debt crisis embroiling the United Arab Emirates. Tubbs highlights energy-rich Qatar, trading at 9.5 times 2010 earnings but with high oil and gas prices offering potential for gains next year.
Ruttman of Credit Suisse says one way to play the emerging markets growth story now is via firms based and listed in developed markets but with large exposure to developing nations.
A recent CS study using a basket of 30 developed stocks deriving over half their profits from emerging markets found these stocks to have performed on par with the MSCI EM in recent years but with better transparency and liquidity, Ruttman said.
The basket includes brewer Anheuser Busch, cosmetics firms Oriflame and Avon and cement firm Lafarge - expected to benefit from urbanization in the developing world.
"There are opportunities within EM ... for instance the biggest laggard market in recent months was China," said Julian Mayo, fund manager at Charlemagne Capital.
"We saw the recent pullback as an opportunity to pick up some domestic demand names," he said, noting Shanghai's 20 percent fall off August peaks before a gradually recovering.
Source: China Daily
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