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Posted by on February 6, 2007, 3:14 pm
> Jose Bailen wrote:
> > Looking at the average price-to-book value ratios (P/B) which is the
> > main indicator of how expensive a market is (high P/Bs usually imply
> > an overvalued markets)
>
> One problem with looking at these metrics in emerging markets is that
> many of these countries lack even basic accounting standards at the
> business level, or standards for reporting those figures at the exchange
> level. It's nothing at all like the US. It's been reported quite a bit
> for China, which is beginning to adopt Western-style standards -- and
> revealing some shaky foundations.
>
> I've seen posts recently here with what look to me like very high
> allocations to these markets, especially some that have run up a great
> deal the past few years. I think it's worth looking at the market
> capitalization (total value of traded shares) of these markets to put
> them in perspective. For quite a few of them, you're talking about an
> entire stock market with a market cap lower than many individual US
> corporations. (grabs Economist Pocket World in Figures 2006...) With the
> run-up these figures may be higher now but consider these 2003 numbers:
>
> Thailand $119B - less than half the size of Citibank
> Turkey $68B - a bit smaller than Apple
> Egypt $27B - a bit larger than Starbuck's or Best Buy
> Morocco $13B - a bit under Bed Bath & Beyond. For the whole market!
>
> Oh and a few developed markets...
> UK $2,412B
> Japan $3,040B
> US $14,266B
As you imply, the *composition* of the index has a huge effect. For
example, banks and resource companies tend to trade at low P/B. The
UK has a very heavy weighting in financial. 4 sectors: pharma, banks,
oil and gas, mining account for something like 60% of the FTSE100
(although most funds index to the All-Share, which is somewhat
broader). 2 oil companies are 16% of the index (Shell and BP).
The biggest Mexican stock (by far) was Telefonos de Mexico, a company
which makes its money on the basis of its domination of Mexican
politics (which blocks new entrants into the telecoms sector, Mexico
has some of the world's highest phone rates).
I remember looking at an emerging markets ETF and concluding that it
was essentially a bet on Korean and Taiwanese tech companies.
https://flagship.vanguard.com/VGApp/hnw/FundsHoldings?FundId=0964&FundIntExt=INT
36% in Korean and Taiwanese stocks at the end of '05.
>
> The notion of buying into a stock market whose entire market cap is that
> of a mid-sized US company raises some questions about liquidity; these
> are sort of the penny stocks of equity markets. Caveat emptor!
It feels as if there is a real rush into emerging markets now.
I now have a good explanation of why risk is underpriced out there,
the product of an article by Gillian Tett of the Financial Times, and
a letter from Pimco published in the same issue.
http://www.ft.com/cms/s/c421f7b2-b262-11db-a79f-0000779e2340.html
http://www.ft.com/cms/s/582ce5bc-b262-11db-a79f-0000779e2340.html
Basically the story runs:
- everyone is borrowing in Japan, and investing in higher return
assets (the carry trade)
- they are hedging their exposure to a rise in Japanese currency,
using options. They can do this cheaply, because the Central Banks,
amongst others, are *selling* currency volatility, as an option
strategy.
So volatility is cheap, because there are structural players out there
selling it.
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