Given events in Argentina, Venezuela, Turkey, and Ukraine, emerging markets are looking more like an emerging threat rather than an emerging opportunity.
However, Larry McDonald, Senior Director at Newedge, says emerging markets are a great place to find bargain investments. The usually bearish author of "Colossal Failure of Judgment" has two reasons why he thinks emerging markets are an attractive buy.
1. Seventeen weeks of outflows from emerging markets
During the first two months of 2014, $11.3 billion have left emerging market equity and bond exchange traded funds, reflecting the overall sentiment of worldwide investors. McDonald sees this as mirroring similar outflows in developed markets that subsequently rebounded significantly.
"What we've seen at the great market bottoms – in the United States, 2009; Europe, 2012 – [is] a surge in outflows," says McDonald. "What's happening now in emerging markets is historic and it's right on proportion with the 2012 bottom in Europe and 2009 bottom in the United States."
2. Lowest valuations for emerging markets since 9/11
Though emerging markets are considered relatively risky, particularly in this environment, McDonald believes they are being over-discounted. He believes investors worried about buying emerging market stocks should heed the words of Seth Karman, founder of hedge fund Blaupost Group, who once said, "Buying right never feels good."
"If you look at the emerging markets now, they are trading at a great valuation with a lot of with a lot of risks in the world," says McDonald. "On a price-to-book [basis], they're at 1.3 times book [value]. Developed markets like Europe and the United States are well above 2.2 to 2.3 times book. But, within the emerging markets, countries like Russia are trading at half [the value] of book and that's too cheap to pass up."
While McDonald acknowledges that fear of instability in places like Russia given the current political climate may be a reason for the deep discount to its stocks, he believes that's overdone. As example, he points to the Market Vector Russia ETF (the RSX).
"The RSX fund has 32 million shares outstanding," says McDonald. "On Monday, 25 million traded. That's the type of thing you see when a biotech company misses earnings or has a failed trial. This isn't a biotech – this is a country's stocks – which is mind-boggling. So, I don't think there's anybody left to sell these names."
To see the full interview with Larry McDonald on emerging markets, watch the video above.
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