Emerging markets have been beaten up this year, but the sector still has its supporters.
Richard Bernstein, chief executive officer of Richard Bernstein Advisors, a subadvisor of Eaton Vance Management, isn’t sure why.
High inflation and overly generous growth prospects in the sector suggest emerging market stocks are not undervalued, he adds.
“When I talk about people’s favorite place to invest, it’s emerging markets. But they do have an inflation problem, a very serious inflation problem,” Bernstein says.
India has the highest rate of inflation outside of frontier markets and Turkey, where citizens have been rioting, has the second-highest rate of inflation, he notes. The Arab Spring riots from last year stemmed from high consumer prices, he adds.
“If you can’t afford the bread, you can’t buy the toaster. Everybody believes in the emerging market consumer, but their purchasing power is being eroded. No one cares about that; [instead] they’re concerned about inflation in the U.S.,” he says.
Bernstein spoke as part of a panel yesterday at the Morningstar Investment Conference in Chicago that looked at the macro landscape.
Investors who cite the cheapness of some emerging market companies aren’t looking at the big picture, Bernstein says. It’s not just a low price-to-earnings ratio that makes a company cheap. Investors need to see other factors that might be influencing the ratio, including interest rates, inflation and risk premium, he says.
Investors should look at a country’s inflation rate and how that correlates to the stock market, he says. Those two measures are usually inverted.
“One reason why people say [emerging markets] are undervalued is because they haven’t looked at the inflation rate. Emerging markets have the highest inflation rates and the highest rates of money growth,” he says.