Visit http://indiaer.blogspot.com/ for complete details Global Emerging Markets Strategy
Small Is Beautiful?
Outperformance — This year has seen significant outperformance by ‘small’
markets within GEMs, rising by an average of 25.2% YTD, compared to average
‘large’ market gains of “only” 13.9%. This relative performance extends a trend
that has been in place for the past decade. In the months ahead, conditions are
becoming more favorable for larger markets to ‘move to the front of the line’ again.
The Mighty Mites — We attribute this year’s outperformance by small markets to:
i) reversal of the pattern of large market gains in 2009; ii) the lower beta feature of
small markets in a very volatile year; iii) funds flows into all emerging markets
which have been very strong, while flows from ‘crossover’ investors have
diminished; iv) sector performances; and v) specific regional and country factors.
Large Market Comeback — Several factors suggest that large markets are due for a
comeback: i) the bull market is better established such that the beta factor begins
to work in favor of large markets; ii) large market underperformance in 2010; iii)
conditions are more favorable for the return of crossover money to GEMs; iv) the
rebound in Chinese stocks suggests the ‘Anything But China’ theme is less valid.
Neutral Valuations — The valuation factor is neutral for the large v. small market
decision. Small markets have become more expensive than large markets on both
forward P/E and trailing P/B ratios (~10% premium on both); however, once
valuations are adjusted for earnings growth (P/E) and ROE (P/B), the relative case
for the larger markets is far less compelling.
Strategy — We expect a return to large market outperformance over the months
ahead. Within this view, however, there are still several small markets that we
favor from a strategy viewpoint, including Thailand and the Czech Republic
(Overweight) and Chile, Peru, Poland and Turkey (Neutral).
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