Contrarians Back EM

Chidem Kurdas

The view that emerging market stocks are no longer the great opportunity they were in past years, that developed markets, especially the United States, offer better prospects, appears to be entrenched as the new conventional wisdom. Certainly the argument is advocated by an impressive number of analysts & pundits.

That, if anything, encourages contrarians to favor emerging markets. They say the conventional wisdom is a sign the cycle has turned and emerging markets are in fact more promising. “Consensus solidifies after an asset class has been on a trend for a significant time,” says one anti-consensus trader.

“It becomes hard to resist. That’s when the trend reverses.”

Another – more traditional – argument for EM stocks: the discount of their price-to-earnings ratios to developed market stocks is around 40%, a historic high. This discount is more likely to narrow than widen, meaning EM are likely to rise against developed markets.

One can find bullish EM specialists but they tend to be almost always bullish, at least about their own particular stock picks. So they are now. That does not tell you much.

Diversified managers who assess markets across the globe are a better indicator. Looking at global equity portfolios, one finds EM names but not in abundance. For instance, Andreas Halvorsen’s Viking Global went for Chinese web services company Baidu Inc. Right now, this trade does not look great. Baidu shares have gone down about 2% since Viking bought them.

But for a firm that reportedly (a year ago) managed $16 billion in assets, Baidu is a tiny fraction of the portfolio.

Some long/short global equity managers invest in EM market indexes instead of – or in addition to – single names. Eric Mindich’s Eton Park Capital bought the WisdomTree India Earnings Fund. Again, this is a small exposure.

All in all, hedge funds that invest worldwide do not show a strong liking for EM at this stage.

There is also the fact that consensus-generating trends can go on much longer than anyone expects. Read about a mistiming contrarian in my book, Ponzi Regulation.

All that does not show the EM anti-consensus faction is necessarily wrong. It shows they are a minority. “Exactly what I’m banking on,” says a contrarian.


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