R.O.I.
By BRETT ARENDS
When Are Asian Stocks 'Cheap'?
The Wall Street Journal
March 21, 2008
Last summer, when Chinese stock prices were heading to infinity, Dave
Semple
noticed a curious thing.
Mr. Semple, manager of the Van Eck Emerging Markets fund, visited one of
the
many booming investor conferences in Shanghai. There an army of private
investors, fund managers and brokers from around the world thronged to
meet
local public companies, and those heading for their public offering, as
they
hunted for the next big thing.
But during one company's presentation, Mr. Semple looked around and
noticed
hardly anyone was paying attention. Instead the investors all had their
laptops open Š and were day-trading the Chinese stock market.
Hello, Silicon Valley 1999.
As I wrote at the time, it was just one more sign the Chinese boom had
swung way into bubble territory.
If you think Wall Street is doing badly right now, you should see the
other
guy. The Shanghai Composite is down 37% from its peak. The Shenzhen All
Share is off 27%. Hong Kong's Hang Seng index is down by a third.
So much for "decoupling."
Last year many brokers around America -- and the world -- assured their
clients that investing in Asian markets would diversify their ****tfolio
and
protect them from the worst damage of a U.S. slump.
Ahem.
The Standard & Poor's 500-stock index is down by just 15%.
The key question now: Are Asian markets cheap?
At the risk of sounding facetious, they are obviously a lot cheaper than
they were a few months ago -- when everyone was telling you to buy them.
Patience, and a disciplined refusal to follow the herd, has earned its
reward.
Anyone investing in Hong Kong is guaranteed to earn 50% greater returns,
over the long run, than those who bought in October.
Nonetheless these markets aren't quite the one-way bet we saw back in
early
2003, when Asian stocks were simply being given away.
On many long-term measures like price-to-sales and price-to-book, for
example, Chinese equities still look very expensive.
Those measures aren't the last word. Mr. Semple points out that
emerging-market companies, and in particular those in China, are getting
much more efficient at generating profits from each dollar of assets and
sales. So the price to sales, and to book value, should be higher.
Nonetheless these measures have usually proven a pretty good way of
cutting
out the short-term noise and revealing bubbles and buying op****tunities.
In the case of China, there are other worries as well. As events in Tibet
are showing, the country isn't free. That brings all sorts of political,
economic and financial risks, especially to outside investors. How far can
you rely on markets where information isn't free?
And how attractive is manufacturing as an industry when labor and raw
material prices are rising sharply and your main customer, the U.S., may
be
heading into a recession?
Nonetheless crisis always brings op****tunity.
And investors may get a bigger bang for their buck in emerging markets by
investing in the smaller companies.
Those have been the hardest hit in the panic since last summer. Many are
objectively cheap.
Mr. Semple's Van Eck Emerging Markets fund is 75% invested in companies
valued under $5 billion. Eaton Vance Asian Smaller Companies is more
focused
on one region. Both have annual expense ratios of nearly 2%.
http://online.wsj.com/article/SB120605201077953043.html
|
