The bull run in emerg­ing stocks may be just get­ting started

Financial Chronicle - - MONEY & MARKETS - AN­DREW JANES

An over­anal­y­sis of geopol­i­tics, “cen­tral bank zigzags” and a fo­cus on com­pany earn­ings are all just dis­trac­tions when it comes to rid­ing bull mar­kets in emerg­ing stocks.

That’s the view of Bank of Amer­ica Mer­rill Lynch, based on an anal­y­sis of six pre­vi­ous bull mar­kets in de­vel­op­ing-na­tion equities go­ing back to 1976. The cur­rent surge is lit­tle dif­fer­ent from the ones that came be­fore it and emerg­ing shares could dou­ble in two years, ac­cord­ing to a note from the Wall Street firm an­a­lysts, in­clud­ing Ajay Ka­pur, head of Asi­aPa­cific and global emerg­ing-mar­ket strat­egy in Hong Kong.

“We think a sub­stan­tial overweight in Asia/EM equities is war­ranted,” they wrote in the note re­leased on Thurs­day. “Let the bull mar­ket do its job.”

Emerg­ing-mar­ket stocks have ral­lied around 60 per cent since early 2016, but the re­cent rise amid ten­sion on the Korean penin­sula has some in­vestors warn­ing that a cor­rec­tion is due. BofAML, how­ever, said the cur­rent bull mar­ket is likely to end the same way the last six have, crushed by re­ces­sion or ex­hausted by over­val­u­a­tions.

In­vestors should sell when price-to-book valu­a­tions, cur­rently at 1.77 for the MSCI EM Index, reach three times, or when they see a US, global or Asian re­ces­sion com­ing, BofAML said in the note. If his­tory is any guide, emerg­ing-mar­ket stocks rise 230 per cent on av­er­age in bull mar­kets that last around 42 months, they wrote.

Apart from a re­ces­sion, BofAML said other risks to its fore­cast are:

A break­out of armed con­flict in Asia.

China go­ing into de­fla­tion, or ex­pe­ri­enc­ing a credit cri­sis and cap­i­tal flight. An­titrust ac­tion breaks up or taxes Asia’s oli­gop­ol­ies, es­pe­cially in the In­ter­net sec­tor. Asia’s mas­sive cor­po­rate free cash­flow is con­fis­cated by gov­ern­ments for pub­lic ser­vice. “This EM/Asian bull mar­ket has legs,” BofAML said in the note. “Cor­rec­tions and pull­backs are in­evitable; we rec­om­mend in­vestors use them to buy.”

In­vestors should sell when price-to­book valu­a­tions, cur­rently at 1.77 for the MSCI EM Index, reach three times, or when they see a US, global or Asian re­ces­sion

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