Emerging-market stock valuations are a “long way” from bubble levels and the shares will outperform developed markets amid faster economic growth, said Antoine van Agtmael, who coined the term “emerging markets” in 1981.
Van Agtmael, who warned of “bubbly” emerging-market stocks four weeks before the benchmark index peaked in 2007, said he doesn’t have the same concern today because valuations are below long-term averages and near those of slower-growing developed countries. Emerging economies will expand three times faster than advanced nations in the next few years, he said.
Money managers and economists from Grantham Mayo Van Otterloo & Co.’s Jeremy Grantham to New York University’s Nouriel Roubini have said in the past month that bubbles are forming in emerging markets as record-low interest rates in the developed world drive investors to faster-growing economies to seek higher yields. The MSCI Emerging Markets Index of shares in 21 developing countries has climbed 10 percent this year, following a record 75 percent advance in 2009.
“To say that we are in a stock-market bubble is completely wrong,” van Agtmael, who oversees about $12 billion as chairman and chief investment officer at Emerging Markets Management LLC, said in a phone interview. “Could we be heading toward a bubble? Absolutely, but we still have a long way to go.”
The MSCI emerging-market index’s price-to-earnings ratio of 14 is lower than its average level of 16 since 1996 and compares with the ratio of 15 for the MSCI World Index of developed- nation shares, according to data compiled by MSCI Inc. and Bloomberg. The emerging-market benchmark index outperformed the developed-world gauge by 6.1 percentage points this year and by 48 percentage points last year, data compiled by Bloomberg show.
“I continue to be bullish on a three, five, 10 and 25-year basis, but for the next 6 to 12 months it’s hard to say,” van Agtmael said. “My guess is emerging markets will outperform, but the difference isn’t going to be like it was in 2009.”
Faster earnings growth and strengthening currencies will drive the outperformance of developing-nation stocks in the next few years and global money managers will increase their allocations as emerging markets produce a larger share of the world’s output, van Agtmael said.
Investors have poured more than $75 billion into emerging- market equity mutual funds this year, compared with $15 billion for U.S. stock funds, JPMorgan Chase & Co. wrote in a Nov. 19 research report.
“Most people are underinvested in emerging markets,” van Agtmael said. “Everyone now seems to realize that 10 to 15 years from now emerging markets will be as important to the global economy as developed markets.”
The Arlington, Virginia-based investor said in an interview with Bloomberg Television on Oct. 1, 2007, that some emerging markets including China had climbed too high. The MSCI emerging- market index peaked on Oct. 29, 2007, and the gauge tumbled 66 percent over the next year for its worst bear market. China’s Shanghai Composite Index sank as much as 72 percent.
Van Agtmael predicted the rally in a March 19, 2009 interview, saying emerging-market shares had been dragged down to the cheapest levels in his 30-year investing career. The MSCI gauge has advanced more than 90 percent since then. The gauge rose 0.4 percent to 1,094.50 at 12:13 p.m. in New York today.
“The markets are not quite as exciting as they were, but returns are still compounding faster than in the developed world,” van Agtmael said.
Emerging markets were widely known as “third-world” countries before 1981.