Emerging market pain is Korea, China’s gain

The $1.5 trillion decline in equities in emerging markets has left South Korean and Chinese shares as the most attractive for Bill Maldonado, who directs stock investments for HSBC Global Asset Management.

“It seems almost foolhardy in the face of the current volatility to be that positive but in reality, we are,” said Maldonado, Asia-Pacific chief investment officer for the unit of the London-based bank, which manages $413 billion.

“The two big outliers today, which look both very cheap and very profitable, are China and Korea.”

While Korean profits are rising, slumping shares have made the benchmark Kospi index the cheapest in Asia, trading at just 0.96 times the value of its constituents’ assets Thursday.

The ratio for China’s Shanghai Composite Index was 1.41 times, after falling in June to the least in 17 years. Maldonado’s outlook for Korea and China contrasts with growing doubts about India, where he’s weighing whether being bullish about investing in the nation was a mistake.

HSBC, Aberdeen Asset Management and Baring Asset Management say some developing-nation valuations are too compelling to ignore after the MSCI Emerging Markets Index slumped 12 percent this year through Aug. 21.

That left it trading at 10.6 times estimated profit, compared with 14.9 for the Standard & Poor’s 500 Index. While Asia’s role as the world’s growth engine is waning, economists surveyed predict expansion of 6.3 percent across the region in 2013. That’s still more than triple the expected global rate.

Investors also should buy shares of banks, energy companies and other industries that benefit from a stronger economy, Maldonado said Wednesday in Hong Kong.

Energy stocks are the cheapest among the 10 industry groups in an MSCI gauge of equities in developed and emerging markets when prices are compared to forecast earnings.

Analysts expect companies in Korea’s Kospi gauge to boost earnings per share by 55 percent in the next 12 months, according to data compiled by Bloomberg.

China Mobile, the world’s largest phone company by number of users, in which HSBC Global Asset Management has invested, traded at 10.3 times estimated earnings on Aug. 21 compared with 13.5 times for AT&T.

The discrepancy in premiums between developed and emerging markets is due to investors preferring liquid large-cap stocks where they can get in and out easily, rather than a rebalancing of world growth or profitability, according to Maldonado.

Growth in emerging economies is still strong despite recent slowdowns, he said.

China, the world’s second-biggest economy, will increase output by 7.5 percent this year, from 7.8 percent in 2012, according to analyst estimates compiled by Bloomberg. India’s economy is expected to expand 5.4 percent in 2014, compared with 5.1 percent last year.

Emerging markets may outperform developed markets over five years, Aberdeen Asset’s chief investment officer, Anne Richards, said at a briefing in Sydney this week.

The fund manager likes Indian stocks on their valuations and growth potential, Peter Elston, Singapore-based head of Asia-Pacific strategy at Aberdeen Asset, told Bloomberg TV India on Aug. 16.

Chinese stocks are attractive as the risk of a sudden economic slump is receding and valuations trail other markets, Agnes Deng, head of Hong Kong and China equities at Baring Asset, said Aug. 12.

Their optimism contrasts with bearish investors who are fleeing riskier assets as the Federal Reserve plans to pare back some of the unprecedented cash it has pumped into the global financial system.

The value of emerging-market stocks slipped $1.5 trillion from a May 8 high through Aug. 21, according to data compiled by Bloomberg.

Thailand is in recession, Indonesian stocks have slumped about 20 percent since their peak, Chinese banks’ bad loans are rising and Malaysia posted its second straight quarter of sub-5 percent growth this week.

While Maldonado remains confident about the prospects for Korea and China, he has doubts about India.

The nation’s S&P BSE Sensex fell 7.8 percent this year through Wednesday on concern that policy makers will sacrifice economic growth as they seek to stem the rupee’s slide to a record versus the dollar.

The CNX Bank Index, which includes State Bank of India and 11 other lenders, sank 26 percent from June 1 through Aug. 21.

“India is a very specific situation and we are looking at that very closely,” Maldonado said. “We’ve been caught out because we are very exposed to the energy stocks and we are very exposed to some of the banks that have state ownership. That’s been exactly the wrong place to be.”

The declines in India aren’t shaking his faith in global cyclical stocks, which deliver profitability at low valuations, according to Maldonado.

“As a fundamental investor, we’re very interested in focusing on valuation and profitability,” he said. “Of course we like growth, but we’re also interested in how much we’re paying for that growth.”

?Bloomberg