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Why All the Macro Gurus Are Betting on Emerging Markets

- By Bram de Haas

I frequently go over recent Guru trades to see what some of the savviest investors on the planet are buying. Usually, there is an idea or two I want to check out more carefully. Worst case scenario, there's a lot to learn from how these men and women think, best case scenario, you find an idea that fits very well with your style.

This time I couldn't help but notice Paul Tudor Jones (Trades, Portfolio), George Soros (Trades, Portfolio), Louis Moore Bacon, Stanley Druckenmiller, Charles Brandes (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) all are buying the iShares MSCI Emerging Index. Five out of six are the most prolific macro traders you can find, but Brandes, who's more of a traditional value guy, is somewhat of a surprise.


What are they betting on here?

MSCI Emerging Markets grants exposure to 23 emerging markets. China, South Korea and Taiwan make up over 50% of the portfolio. The index contains about 800 stocks but the top 10 holdings include Samsung Electronics (SSNLF), Bank of China (601988.SS), China Mobile (CHL), Hong Hai Precision and Alibaba (BABA).

Table (ticker, company, industry, geography, weight):

005930

SAMSUNG ELECTRONICS LTD

Information Technology

Korea (South)

3.67

2330

TAIWAN SEMICONDUCTOR MANUFACTURING

Information Technology

Taiwan

3.50

700

TENCENT HOLDINGS LTD

Information Technology

China

3.50

BABA

ALIBABA GROUP HOLDING ADR REPRESEN

Information Technology

China

2.62

941

CHINA MOBILE LTD

Telecommunication Services

China

1.65

NPN

NASPERS LIMITED N LTD

Consumer Discretionary

South Africa

1.61

939

CHINA CONSTRUCTION BANK CORP H

Financials

China

1.57

BIDU

BAIDU ADR REPTG INC CLASS A

Information Technology

China

1.19

1398

INDUSTRIAL AND COMMERCIAL BANK OF

Financials

China

1.11

2317

HON HAI PRECISION INDUSTRY LTD

Information Technology

Taiwan

1.01



Data: iShares

Having to guess what the gurus' motivations really are, the trade may be primarily driven by valuation. Without a severe crash, China has been fighting headwinds for several years. Many other emerging markets are suffering because of low oil prices as countries like Russia and Brazil are greatly dependent on black gold to fill their coffers.

As per Morningstar:


The average difference in trailing 12-month P/E ratios for the MSCI World Index relative to the MSCI Emerging Markets Index was 2.7, showing that emerging markets tend to trade at a lower valuation than developed markets. At the end of August 2016, the difference was 5.0, indicating emerging-markets valuations relative to developed markets are currently lower than their trailing 10-year average.



Currently, the iShares MSCI Emerging Market ETF trades at a level that corresponds to an average Price/Forward Earnings ratio of 11.57x, while the MSCI World Index sports a 17.2x average ratio. A difference of 5.36x or in other words the MSCI Emerging Markets ETF trades at a discount of 33% to the MSCI World Index. The S&P 500 trades at a 18.5x multiple even.

With the valuation gap quite a bit above historical averages, it looks like they are betting on a reversal to the mean here. Not a bad idea as there isn't a real good reason why the MSCI World should trade at such a sizeable premium. Over the long term, the market is a weighing machine and a dollar earned weighs the same, no matter where you weigh it.


Disclosure: Author owns none of the stocks mentioned.

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This article first appeared on GuruFocus.