Emerging Markets Rebounding

Short-term pain leads to long-term gains in emerging markets, or so argue fund managers who focus on them. Does that mean explosive conflicts between Ukraine and Russian separatists and between Israel and Hamas in Gaza present buying opportunities?

At the end of July, the MSCI Emerging Market Equities Index companies were trading at just 1.3 times book value and at a discount of price-to-book value. Stocks were trading at about 10 times earnings—less than the P/E ratio of stocks in the United States, Japan, Europe and the United Kingdom. In addition, the per capita income, productivity and economies of these countries exhibited faster growth rates than those of developed countries.

“We don’t run a lot of cash,” says David Ruff, manager of the Forward Emerging Markets Fund. “We are a bottom-up investor. Asia offers the best perspective for growth, value and yield. Eastern Europe is better from a value and yield standpoint, but growth is a question mark at this time.”    

Ruff isn’t fazed by territorial turmoil in the South China Sea. He says China is evolving from an export economy to a consumer-driven economy. He likes small companies, such as China Yuchai International Limited, which transports domestic goods in China.

He increased his exposure to Russia. He is investing in MMC Norilsk Nickel, a nickel and palladium mining and smelting company. Both companies have strong balance sheets, low dividend payout ratios and free cash flow. The stocks were yielding more than 7%.

Meanwhile, Heidi Heikenfeld, manager of the Oppenheimer Emerging Markets Innovators Fund, is finding good deals in companies with high profit margins and market capitalizations of up to $10 billion.

She says the emerging markets are holding up well despite the turmoil. The average diversified emerging market fund is up 8% for the year ended in July, according to Morningstar in Chicago.  
   
“I’ve been surprised,” she says. “Russia and Taiwan [stocks] are beaten up.” Nevertheless, she is standing pat in Russia and buying mid-cap and small-cap growth stocks worldwide.