Sunday, May 3, 2009

Emerging-Market Stocks May ‘Break Out’ by Year-End, Mobius Says

Emerging-market stocks may “break out” into a bull market at the end of the year as falling interest rates and easing inflation make equities more attractive, Templeton Asset Management Ltd.’s Mark Mobius said.

Mobius reiterated that emerging markets are “building a base” for the next rally. Chrysler LLC’s bankruptcy filing and other “short-term risks” may hold back the rally, while speculators may bet stocks will fall, he said.

“We are at the base building period for the next bull market,” Mobius, who helps oversee $20 billion in emerging- market assets at San Mateo, California-based Templeton, said yesterday in an interview in Bali, Indonesia, where he’s attending a conference. “What I see happening is perhaps this continuing till the end of the year, and then a break out.”

Developing markets made up all 10 of the best-performing stock indexes in 2009, led by Peru and China. The MSCI Emerging Markets Index has jumped 17 percent this year, compared with a 2.6 percent retreat in the MSCI World Index.

Since Mobius said on March 23 that the base for the rally is being built, the emerging-market gauge rose 20 percent, outpacing the global measure’s 13 percent advance.

Government stimulus programs from the U.S. to China have prompted Federal Reserve Chairman Ben S. Bernanke to say there’s evidence of “green shoots” in some markets. Reports on consumer confidence and manufacturing in the world’s largest economy last week spurred optimism the worst of the recession may be over.

Growth Outlook

The International Monetary Fund, the Washington-based lender with 185 member nations, said last month the world economy may shrink 1.3 percent this year, compared with its January prediction of 0.5 percent growth.

Short sellers are increasing bets against developing-nation stocks by the most since March 2007, a signal the biggest rally in 16 years may fizzle as profits plunge.

Short interest in the iShares MSCI Emerging Markets Index fund, which tracks equities in 23 developing nations, climbed 51 percent in March, the biggest jump in two years, according to New York Stock Exchange data compiled by Bloomberg. The growth in short sales, where investors borrow stock and sell it on the expectation prices will fall, marks a shift from the last three rebounds in emerging-market stocks. In those cases, traders closed out their bets.

Chrysler, based in Auburn Hills, Michigan, is the latest U.S. company to file for bankruptcy after a group of 20 secured lenders rejected an offer by the government that would have paid them $2.25 billion for $6.9 billion of debt, or 33 cents on the dollar.

‘Green Shoots’

“There are green shoots in the American economy,” Mobius said. “Some companies will declare lower earnings but there are still companies posting rising earnings.”

BNP Paribas Asset Management was also upbeat about the recovery of emerging-market stocks, saying shares in Brazil, Russia, India and China present the best combination for a recovery in economic growth amid continued volatility.

The investment firm turned positive on Russia in March and now holds more shares in the four so-called BRIC markets than benchmark indexes suggest, Martial Godet, who helps oversee the equivalent of $44 billion of assets as Paris-based head of investment management for new markets at BNP Paribas, said in an April 30 interview in Singapore. He said he expects the “outperformance” of the four markets to continue.

Even after the rebound this year, the emerging-market index is valued at 1.58 times book value, lower than its five-year average of 2.1 times. Based on estimated earnings, the measure has a multiple of 13 times.

‘Pretty Cheap’

“If you look at price-to-book value, you see that it’s below the average that we’ve seen for a number of years,” Mobius said. “We are not buying stocks that have a price- earnings ratio of over 10, by and large, with some exceptions, and we look at a five year time frame. Looking five years out, things look pretty cheap.”

Hong Kong-listed Chinese companies will be the best bet when the emerging markets embark on the bull market, with companies that supply commodities and cater to consumers benefiting the most, Mobius said. He also favors shares in Turkey, South Africa and Brazil, he added.