True Wealth from Emerging Markets?

09/10/2004 12:00 am EST


Steve Sjuggerud

Founding Editor, DailyWealth

Dr. Steve Sjuggerud is president of Investment University, an educational advisory. In his True Wealth newsletter, he often takes a contrary stance, while consistently offering exciting, global opportunities. Here's his latest on the potential for emerging Asian markets.

"I was a broker back in January of 1994, when investors got scared out of emerging markets, particularly Asia. I learned the pattern of emerging markets. They double, then fall in half, then double, then halve, etc. It's not like clockwork. But they do go through some serious extremes. The months preceding January 1994 were exceptional. Hong Kong's Dow (the Hang Seng Index) nearly doubled. My phone was ringing off the hook, with US investors desperate to buy stocks in Asia. By January 1995, one year after the Hang Seng peaked, those stocks were cut nearly in half. My phone stopped ringing completely, for a very long time. The funny thing is, it would have been the perfect time to buy, as the Hang Seng Index doubled by 1997.

"In 1997 everyone was excited about Asia once again, and then the Asian Crisis hit. The Hang Seng was cut in half again in 1998. But in the year 2000 it more than doubled. Almost unbelievably, by 2003, it was cut in half yet again. And that's how it goes in emerging markets - way up, way down, way up, and way down. It's a roller coaster ride. But now may be one of the most attractive times to consider buying. These stocks are 50% below their 1994 peaks, and business is good. Two very good ways to play emerging markets in general are the Morgan Stanley Emerging Markets Fund (MSF NYSE), which currently trades at a double-digit discount to its underlying value, and the iShares MSCI Emerging Markets Fund (EEM AMEX), which is like an emerging markets index fund. Both are good plays on the sector and easy to buy and sell.

"Actually, emerging markets today remind me of buying US stocks in 1982. Emerging markets are trading at a forward P/E ratio of less than 9. Yes, a single-digit P/E, which is something we haven't seen in the US since 1982, which would have been an extraordinary time to buy US stocks. Generally when stocks are super cheap, something has gone seriously wrong, like the Asian crisis, for example. But today there is no crisis. On the contrary, according to Morgan Stanley, emerging market companies as a group are delivering their highest return-on-equity numbers in their history. When investors get scared, they get the heck out of emerging markets. And they are out of them now. It is my opinion that fear will pass once the US election has passed, and emerging markets could rally nicely. Get there first.

"In particular, South Korea is one of the cheapest stock markets in the world. It trades at a P/E of just seven times estimated earnings. While fund managers like to flee Korea whenever they get scared, the opposite is true too; when investors decide to take on risk again, it is a great place to be. Korean stocks can double quickly from here. And quite frankly, they'd still be cheap. The Korea Fund (KF NYSE) is the best way to play it. As I write, it's trading at a 10% discount to the value of the stocks in the fund. That's great, as we get to buy cheap stocks at a discount. I love it. While the fund can trade at an even greater discount than 10%–15%, it's not that likely. The fund's manager has shown great skill at beating the local index. And, I like what he's holding in his fund. Its five largest positions are Samsung Electronics, Samsung Fire & Marine, POSCO, SK Telecom, and Samsung Electronics 5.8% preferred.

"Massive Korean steel maker, POSCO, is the world's lowest cost producer of steel. It will soon have no net debt (more cash than debt). It is a cash–generating machine, with a forward P/E of about five. It will pay a 6%–plus dividend. And yet nobody wants it — because it's in Korea. International high–tech leader Samsung Electronics is another example of a Korean behemoth that nobody wants. Since its April highs, the stock is down nearly 40%. Its forward P/E is six. Meanwhile, Korea just cut interest rates to a record low 3.5%. Companies should be able to do just fine in that environment. It's a simple story. When investors get willing to look for risk again (which should happen by election day), Korean stocks will likely do extremely well. Overall, for those seeking a diversified way to buy Korea, this is the way to go."

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