By Sujata Rao
LONDON, Dec 4 (Reuters) - 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 this week after
hefty falls fuelled by fears a debt crisis in Dubai would
paralyse 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
<.MSCIEF> 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, Czech Republic and Hungary have
underperformed and will probably outperform in the coming year."
The past months' rally has pushed Latin American stocks
<.MILA00000PUS> to 13.6 times one-year forward earnings versus a
five-year average of 10, while non-Japan Asia <.MIAPJ0000PUS>
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
<.MIEE00000PUS> 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 <.MICZ00000PCZ> 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 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. "They are laggards compared with others."
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 the country 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.
FRONTIER
The Gulf, however, is still a frontier market, meaning many
fund managers are constrained from investing there. Similarly,
central Europe has a tiny index weighting -- Czech, Polish and
Hungarian stocks together account for 2 percent of the MSCI EM.
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 <ABI.BR> which
dominates Brazil and is growing in China, cosmetics firms
Oriflame <ORIsdb.ST> and Avon <AVP.N> and cement firm Lafarge --
expected to benefit from urbanisation in the developing world.
The basket trades at a 12-month forward PE of 11.9 times, an
11 percent discount to the MSCI EM, versus average historical
premium of 14 percent, Ruttman said adding: "Given better
earnings growth for 2010 and 2011, the valuation might become
even more attractive for indirect EM plays going into 2010."
But diversified exposure to emerging markets can be a minus
as shown by the recent selloff in UK-listed banks HSBC <HSBA.L>
and Standard Chartered STAN.L> due to heavy Dubai debt exposure.
And many deny emerging stocks are overvalued, arguing better
earnings prospects in the developing world make a case for even
higher prices. And bargains may be found in unexpected places.
"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.
(Reporting by Sujata Rao; Editing by Toby Chopra)
((sujata.rao@thomsonreuters.com; +44 207 542 6176; Reuters
Messaging: sujata.rao.reuters.com@reuters.net))
