Gavekal Capital: Catching Up With Emerging Markets

Thursday, December 11, 2014

Catching Up With Emerging Markets

The MSCI Emerging Market Index has had a slightly better year than its developed market counterpart. The average stock in the MSCI EM Index is up 4.9% year-to-date in USD terms compared to a 2.2% rise in the developed market index. However, that average number doesn't really tell the true story as this year has been marked by divergent returns depending on which sector you look at. At the top of the leaderboard, telecom has been the best performing sector on an equal-weighted basis. Telecom is up over 30% year-to-date followed closely by the health care sector (+26.7%). At the bottom of the leaderboard, we find two very cyclical sectors. Unlike in the developed world, the energy sector is not far and away the worst performing sector. In the emerging markets, it has company at the bottom. The energy sector is down over 9% year-to-date while the materials sector is down over 12% year-to-date.

MSCI Emerging Market Index - Performance
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From a valuations perspective, health care has by far the highest valuations on an equal-weighted basis. Health care is looking at a P/E of over 36x and a P/CF of over 37x. The average P/CF ratio is 17.5x, which is higher than the average P/CF ratio in the developed world (14.5x). Financials have the lowest P/E ratio of any sector in the emerging markets at 14.6x.

MSCI Emerging Market Index - Valuations
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Interestingly, while financials have the lowest P/E ratio they have the second highest expected sales growth over the next four years. Health care has the highest sales growth expectations, while telecom has the lowest. From an EPS growth expectations perspective, health care also has the highest average EPS growth expectations over the next four years. Industrials have the second highest and materials have the third highest. Utilities have the lowest growth expectations in the emerging market.

MSCI Emerging Market Index - Sales Growth Expectations
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MSCI Emerging Market Index - EPS Growth Expectations
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