For more than a year, Research Affiliates founder and CEO Rob Arnott and his CIO Chris Brightman have been arguing that beaten-down emerging market equities are a screaming buy when compared to fully valued U.S. large-cap equities.

As evidence, Arnott and Brightman point to the huge gap between the Shiller CAPE (Cyclically Adjusted Price-Earnings) ratio on the S&P 500 and most emerging markets equities indexes. The Shiller P/E on the S&P 500 is in the low- to- mid 20's, while it is around 9 or 10 for emerging market equities.

Arnott readily admits he doesn't know when the two indexes will converge, but he is quite confident the gap will be a lot smaller in three to five years. He doesn't pretend to possess the clairvoyance to foresee what events will trigger such a convergence, but he is confident the laws of mathematics make it almost inevitable.

After moderating several panels at Financial Advisor's Asset Managers Showcase in Boston Wednesday, it's safe to say many smart people disagree with Arnott and Brightman. Few were more outspoken than Wells Capital's portfolio manager Margie Patel.

The vast majority of emerging markets are commodity based and the collapse in the price of many global commodities is undermining many emerging nations, including Brazil and Russia, Patel noted. Theoretically, cheap commodity prices should benefit big commodity consumers, such as China. In reality, the two-year slowdown in China's economy isn't getting much relief from cheap raw materials. Indeed, its problems seem to be worsening.

Emerging market debt has increased by $500 billion in the last five years, Patel noted. Others added that it has grown at a rate three to four times faster than their underlying economies.

Jim Swanson, CIO of MFS, pointed out that while the Shiller P/E ratio was a useful measure for taking the cyclicality out of earnings measurements, it has significant flaws and makes U.S. stocks look like they are in a bubble. He didn't say it, but one reason underlying this phenomenon was that in 2009, many U.S. companies reported huge losses and traded at P/E ratios approaching infinity, thus distorting their 10-year averages.

Swanson added that compared to emerging market companies, U.S.companies have superior profit margins and significantly lower unit labor costs, while their workers are more productive, justifying the multiple gap.

Loomis Sayles vice chairman Dan Fuss was slightly less negative on emerging market nations. Countries in Southeast Asia have serious potential, but they can't get out of each other's way, he said. Relations between governments, the business sector and the citizenry are problematic.

Besides, Fuss said, their markets haven't been beaten down that badly. "It's very hard to make a case for emerging markets debt, except in certain cases," Fuss contended.

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