Surviving Bloody Monday In Emerging Markets

October 07, 2008


In fact, some of the same ardent supporters of emerging markets are arguing that now's a good buying opportunity. They point to declining price-earnings ratios. It's true that some leading emerging markets stocks that were once trading around 19 times trailing earnings in some cases are valued at half those levels now.  

"It's certainly an opportune time looking strictly at fundamental valuations," said Shaw, who oversees portfolios for his Glastonbury, Conn.-based firm's institutional and high net worth clients. "But when people are afraid like they are now, they don't care about PE ratios and price-to-book values. The vast majority of investors are just trying to avoid a train wreck."

Even those who are willing to listen to such estimates, he adds, aren't as willing to drink the emerging markets Kool-Aid after years of overhype. "Nobody really knows what the impact of the credit crisis will be on PEs and earnings over the next several quarters," Shaw said. "Conditions are changing so rapidly right now, there's just no confidence in the fundamentals right now."

His own investments are heavily in cash. But he has been scaling back gradually. Shaw adds that he plans to keep holding existing emerging markets funds already in his portfolio.

Routine Maintenance 

Nusbaum is doing much the same after Monday's pummeling. "Anyone who has been investing in emerging markets over the past several years has seen those values go up at a faster rate than the rest of their portfolio," he said. "Scaling back as part of routine maintenance of a diversified portfolio should've already taken place."

Portfolio manager Payne agrees. But he says that investors need to take a close look at what they own when buying emerging markets ETFs. He points out that EEM's largest position, for example, is Russian natural gas giant Gazprom. Its second-biggest name is consumer electronics maker Samsung, followed by Taiwan Semiconductor.

"Energy, Basic Materials and Tech account for nearly 60% of EEM's portfolio," Payne said. "Most emerging markets indexes are driven by highly cyclical sectors. They typically have very little exposure to more defensive sectors like Health Care and Consumer Staples."

But that lack of diversification is a major reason why Payne isn't recommending investors walk away from emerging markets anytime soon. Instead, he's looking to complement his broad-based emerging markets ETFs with niche developed markets funds. Those include: the iShares S&P Global Healthcare Sector Index Fund (NYSEArca: IXJ); the iShares S&P Global Industrials Sector Index Fund (NYSEArca: EXI) and the S&P Global Consumer Staples Sector Index Fund (NYSEArca: KXI).

"The middle class is still just forming in most of the countries. As a more affluent class develops, so will sectors such as Health care and big-ticket goods and services," Payne said. "Over the next decade or two, we expect emerging markets to diversify and compare much more favorably to developed markets. But we're still a long way away from reaching that point."

Murray Coleman is managing editor of He can be reached at: [email protected].





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