Is there a bubble in emerging markets?, asks the FT’s John Authers in Thursday’s Short View column. Since the Fed’s discount rate cut last month, the sector’s rebound has prompted understandable fears.
MSCI’s emerging markets index has rebounded almost 25 per cent since then. As Merrill Lynch’s Michael Hartnett said last week, this sounds like the emergency rate cuts of 1998, which caused a gush of liquidity towards US technology, and 1987, when the beneficiary was Japan. Those bubbles, of course, burst a few years later.
A look at valuations is “more reassuring”, says Authers. The MSCI emerging markets index trades at 17 times earnings – slightly higher than the MSCI World index, which trades at 16.25.
These lines crossed earlier this summer. This decade’s boom in emerging markets has been based on value, not just growth. Five years ago, the developed markets were trading at a multiple of 30 – double that of emerging markets.
Given concerns about growth in the US, a slightly higher earnings multiple does not look insane – although it certainly signals that the era of value in emerging markets is over, he notes.
China and India, however, dominate the flows of foreign money. Here the picture is different.
MSCI shows India trading at a multiple of 22.9 and China at 48.8. This does look like a bubble. In both cases, their growth to date owes much to multiple expansion: India’s doubling in three years; China’s trebling in two years. For both, the growth story is compelling, but authorities are tightening monetary policy, not normally a good time for multiples to expand.
So there is not – yet – a generalised emerging markets bubble. There is growth in emerging markets, for those who do the necessary homework and take the necessary risks.
But there is no great bargain opportunity, either. And the way funds are piling in to the most popular markets suggests bubbles could easily form there.