Rekenthaler Report: Oct. 28
BRIC-a-brac, the Greenspan bashers, and more.
All for One, One for All
A year ago next week, I joined a panel of investment managers in discussing the outlook for emerging-markets stocks. Unusually, the panel was in unison. We were to a member skeptical--our belief being that BRIC (Brazil, Russian, India, China) stocks were incorrectly trading at price/earnings multiples that were similar to those of developed markets, when they should instead trade at a discount, as they had done historically.
This struck some audience members as mere fogyism. After all, today's developed markets were once emerging themselves. In hindsight, muttering darkly in 1904 about U.S. equities deserving to trade at lower prices than the established markets of France, the U.K., and Germany would have been quite foolish. So we took a few hostile questions about our failure to understand that a sea change had occurred and that the old rules for the relationship between emerging-markets and developed-markets stocks no longer applied.
That argument may eventually prove true, but not yet. BRIC funds are down about 60% year to date, making even the FTSE All Share and Dow Jones Industrial Average appear robust. When the going got tough, the tough, the weak, and everybody in between got going--away from the less established corners of the global stock market, and back to (relative) safety.
Score one point for groupthink. The prophets of doom don't always walk alone.
Less (Growth) Is More
The argument against emerging-markets stocks goes deeper than temporary price multiples, however. Counterintuitively, The London Business School recently conducted a study showing that the higher a country's growth rate, as measured by growth in GDP, the worse its expected stock returns. Conversely, the lower the growth rate, the better the returns. The LBS looked at 17 countries over a time period of more than a century in arriving at this conclusion.
The lesson to be drawn is that bad CEOs can pillage more shareholder wealth than good economies can create. If you think our CEOs have some answering to do for their high salaries, then you'll really love the emerging-markets mind set, where so often over history "shareholder assets" have equated to "goodies for corporate managers." Also, emerging-markets companies tend to overinvest, thereby diluting their earnings through unnecessary issuances of new shares. Over the past 20 years, according to one French researcher, companies in developed markets diluted shareholder value at a rate of 2% per annum, while those in emerging markets did so at 13% per year.
On the bright side, emerging-markets shares are starting to look like a good value after this year's pounding. As I am nearly always early with such musings, they will likely appear to be an even better value in six months' time.
Just Saying
The average age of a fund in Korea is 8 months. Korean investors tend to regard funds much older than that as being past their prime.
I certainly hope that they never evaluate me.
No Country for Old Men
Speaking of evaluations, I'm having a hard time hopping aboard the beat-on-Greenspan camp. The splendidly named American newscaster Anderson Cooper has festooned millions of TV screens with his poster of Greenspan as being among the current financial crisis's Ten Most Wanted villains (poor Alan looks more than faintly ridiculous in his faux Western portrait), and then Congress followed suit in last week's grilling of the former Mr. Chairman. But who of us can withstand such scrutiny for each of our major decisions over the past two decades?
Besides, I do not recall U.S. political representatives saying anything of the kind during Greenspan's frequent visits to the House during the early and middle part of this decade.
It's hard to say "I told you so," when in fact you didn't.
But one thing, Alan--drop the bit about this being a "once in a century tsunami." Morningstar's Paul Kaplan points out that the Ibbotson stock charts cover 82 years, and by gosh there are two such tsunami(s) on those charts. And Paul is quite polite when compared with my mother, after I told her that according to Greenspan math, she must be at least 100 years old.
