Emerging Markets

An interesting article from Research Affiliates and via Abnormal Returns.com arguing that emerging markets are priced attractively relative to the US.

Here's the main take away from the article:

"....U.S. equities, judging from their initial sharp negative response to the tapering announcement, have become bond like!  Bad employment numbers and weak housing starts are now good news for equities as they keep rates low.  High yielding stocks, which have enjoyed significant outperformance in the recent years thanks to their income advantage in a low rate world, appear to be most at risk.  Nonetheless, eventually prices are set by fundamentals, even if in the short-run liquidity and flows can push prices away from fair valuation.  Ben Graham’s famous analogy captures this combination of long-term and short-term dynamics: the market is ultimately a weighing machine in spite of its more transient role as a voting machine.  Knowing the estimated long-term valuation allows investors to profit from short-term over- and under-adjustments.  As carry strategies are reversed and the ensuing momentum is driven by hot money, rising rates will continue to cause price declines for nearly all asset classes.  This can mean buying opportunities for investors looking to take positions in pro-cyclical risk assets as the U.S. and global economy slowly regain their footings. 

In particular, EM equities appear to be the more sensibly priced asset class for accessing global growth.  They are trading at a Shiller cyclically adjusted PE (CAPE) of 13.4x, as compared to U.S. equities trading at a Shiller CAPE of 23.6x......." 

In our Letter to A Boston Boy back in July we made our case for foreign exposure via ETFs and why we've been adding these to client portfolios.  These markets have been on a run since then but are still undervalued to US assets according to our work.  Nice to see some empirical work that seems to agree with our thesis.

I have to be out tomorrow but I will be posting on  Thursday and Friday.

Link: Research Affiliates:  The Impact of Tapering on Risky Assets.

*Long certain foreign and emerging market ETFs in client and personal accounts.