Emerging Market Undervalued

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Submitted by svelte on April 3, 2020 - 8:15pm

I read this article with great interest:


What is the theory on why Emerging Market and Developed International have been so undervalued since about 2012?

And what has changed such that they should return to fair value?

Submitted by Rich Toscano on April 3, 2020 - 8:39pm.

Thanks, good to hear that someone besides my mom finds these interesting!

(Just kidding - my mom doesn't read them either).

Historically, US and intl stocks have traded leadership back and forth over time.

(Note: Japan is removed from developed int'l in this chart because the late 80s Japan bubble jacks up the otherwise pretty clear pattern).

Tough to say why they cycle back and forth like that. In this latest cycle, it's definitely the case that US earnings held up better than international, so some of the outperformance was legit. But then it went way beyond that.

It just seems that these cycles reinforce themselves... something goes up, then people think it must be better, so they buy it, and it goes up more, etc. And the whole way, people rationalize it, and the continued trend justifies and strengthens their rationalizations. Until something puts the cycles into reverse.

BTW, the EAFE-ex Japan series outperformed the US (slightly) from 1972-2008. The entirety of US outperformance has happened in just the last 12 years. I'll bet a lot of the "US stocks are inherently superior" crowd would be surprised to learn that.

Anyway that's my take. As for what causes a potential reversion, I don't think that's identifiable in advance. There's a big shakeup happening right now; I wouldn't be surprised if this turns out to be it. But there's no way to know, in my view.

Submitted by svelte on April 3, 2020 - 8:49pm.

I like that answer. It's straight up.

One reason I found the article interesting is it matched my experience. You may have read on here where I said I've gotten screwed by international stocks many many times and am tired of getting my fingers burned. Well, that's exactly what the chart in the post showed.

Maybe now I should jump back in? That's what I'm trying to evaluate. My recent analysis says that US stocks have dropped a lot yes, but that doesn't mean they are undervalued, just that they were way overvalued.

So where does that leave me?

Contemplating international. But maybe I'll buy a set of asbestos gloves first...

Submitted by gzz on April 3, 2020 - 10:45pm.

I am not so bullish on stocks.

Short term, we’re still way above 2009 lows adjusted for inflation.

Sometime this month we may hit Great Depression levels of unemployment. We’re probably at a post-GD all time high right now.

Fed intervention is very appropriate, but pumping money in response to a supply and demand shock doesn’t seem like it fixes things. Many of us won’t spend it, and the ones that do drive inflation. The latter is important now to prevent deflation, but getting it right is hard and the modern Fed has always erred on the deflationary side.

Non-US returns measured in dollars will suffer if people all pile into and drive up the dollar. This is already happening, with the peso quickly going from 18 to 24.

SP500 range in 2016 was 1900-2300. It is about 2600 now. It has looooong way to drop still without being a strong buy.

When Tesla isn’t worth more than GM and Honda and Ford put together, maybe then stocks won’t look so frothy.

Submitted by henrysd on April 3, 2020 - 10:57pm.

svelte wrote:
I read this article with great interest:


What is the theory on why Emerging Market and Developed International have been so undervalued since about 2012?

And what has changed such that they should return to fair value?

The bond market in emerging countries tells a different story. In US dollar terms emerging market bond had heavy loss this year, and more losses are expected.
2 main issues for EM:

1) EM companies and sometimes government has a lot of debts in U.S. dollars, in a crisis situation like we are experiencing recently, EM countries will have difficulty servicing their dollar debt as lower local currency forces them pay more in local money for dollar debt.

2) EM economy lack leadership countries now. China used to be that role, but it already ran through its course of growth spurt. It is now stuck in middle income trap and slower growth which might not be enough to support its obligations from looming issue of serious population aging and shrinking workforce. The high level of private section debt load is another time bomb. The real estate bubble in China is 10 times the size of U.S. sub prime mortgage. A prolonged global recession could simply collapse the bubble. China is still leaking foreign currency reserve as rich Chinese will find out whatever way to move money overseas as China has no law to protect private properties/assets, and government can take over your assets at any time at will (communists in China got into power by that way, so they can do it again, rich people in China don't feel confident put their money in China). Trade surplus used to bail out on that as surplus normally is more than the asset transfer. With trade war and developed countries in recession, they can no longer get foreign currency easily through trade surplus.

EM markets are highly correlated. Trouble in one country will quickly spread out to other countries.

EM stocks are good buy when market is chasing risky assets. In current situation I try to avoid.

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