It is difficult to find attractively valued assets today. Interest rates in the developed world remain near record lows, and investors continue to pour into riskier assets, driving up valuations. U.S. stocks have enjoyed a five-year rally, with the S&P 500 currently trading at a trailing 12-month price/earnings multiple of 18 times, above their historical average of 15 times. Certain pockets of the emerging markets are also trading at lofty valuations, thanks to new market-friendly reforms (Mexico) or a relatively strong near-term growth outlook (the Philippines).
Markets trading at depressed valuations, such as Russia and China, are likely to remain cheap in the medium term. Russian firms are operating in a weak domestic environment that is further hampered by Western sanctions and falling oil prices. As for China, many large firms, which used to enjoy a relatively oligopolistic operating environment, face an uncertain future as the government pursues a confounding reform agenda that tries to combine both market liberalization and state-control ideologies.
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Source: MSCI. Data as of Sept. 30, 2014.
Annualized 2-Year Returns
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Source: Morningstar Direct. Data as of Sept. 30, 2014. The MSCI indexes are market-cap-weighted and denominated in U.S. dollars.
India
India has been one of the best-performing markets this year (the MSCI India Index is up 25% year to date)--so now might not seem to be the best buying opportunity. Both domestic and foreign investors have fueled a strong rally based on their optimism that newly elected Prime Minister Narendra Modi will foster a more business-friendly regulatory environment, as he did when he was the leader of the Gujarat state in western India.
But there is a new catalyst that may help sustain the rally in the near term: falling oil prices. Historically, one of India’s challenges has been the government’s inability to cut fuel subsidies. These subsidies (the diesel subsidy is estimated to cost $10 billion a year) have increased the country’s fiscal deficit, hindered its ability to spend on infrastructure, and negatively affected its credit rating. But Modi used the recent decline in oil prices as an opportunity to end the diesel subsidy earlier this month, at a time when it would have a relatively small impact on consumers. Lower oil prices should also result in many positive knock-on effects on the domestic economy, as India imports about 70% of its oil needs. Pressure on the country’s current account is easing and inflation is falling, which may prompt India’s central bank to lower rates earlier than expected. Consumers, with more money in their pockets, are feeling more confident. This improving macroeconomic environment, combined with Modi’s ambitious reform plans, may create a virtuous cycle and set the stage for India’s long-awaited next phase of growth.
India Equity funds available for sale in Hong Kong with biggest fund size
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