Asiaweek Agenda Personal Finance

Why invest in emerging markets when established ones like New York and London are breaking records?

Because established markets are at or very close to their peaks, smart investors should be looking at emerging markets. Whether you have been invested in the developed markets or are looking to invest now, you would realize emerging markets are looking attractive from a valuations standpoint. Price multiples are far more attractive than in any developed market. Average price-earnings multiples or p/es in emerging markets as a whole are just over 14 times this year's earnings, compared to over 25 times for developed markets. The latter always sell at a slight premium to emerging markets, but the gap now is huge. So there is a very strong case to switch to emerging markets.

But if there is a correction on Wall Street, wouldn't that gap suddenly narrow?

It would, but emerging markets would still be attractive; they haven't gone up as much. And the key really is the growth prospects. Over the next two years, earnings in emerging markets are likely to grow 30% per annum against less than 20% for developed markets. Over a five- or 10-year period, returns in emerging markets have been better.

But in the past, emerging markets have left a sour taste.

In some cases. Some people over-enthusiastically promote a new market just because nobody has heard about it. But that doesn't mean you should stay away from all emerging markets. For us, Brazil has been the flavor for the past three years and the market has done very well. It has kept tasting better and better, though we think it might be close to its peak and we are reducing our weightings there. In many cases a good story can last three, four years; in others it can turn sour pretty quickly. But developed markets and stocks of bigger companies are no different.

After flocking to Asia in the past decade, global investors are fleeing in droves. What's wrong?

Asian markets, in some cases, became far too expensive or went way ahead of the fundamentals. Now we are starting to see very interesting valuations. In some countries it is probably too early to start bargain-hunting, particularly in Malaysia and Indonesia, which have some way to go in the downward plunge. But in selected sectors in Thailand, for example, or the Philippines, there are a few bargains emerging. The one market we like now is Korea, which we think has bottomed and is about to break out of the doldrums. It's a very export-oriented economy and its exporters are now looking very competitive. We will see electronics, steel and chemicals rebound very strongly in coming months. Korea has been in the doldrums for far too long. The Indian subcontinent -- India, Pakistan, Sri Lanka -- are looking attractive. They lagged while other Asian markets surged; I feel we will see very strong performance from these markets over the next two years.

Has the currency turmoil changed your perception of Southeast Asia ?

Luckily for us we reduced our weightings in many Asian markets to almost zero just before the turmoil began. We had almost no money in Indonesia and Malaysia, very little in the Philippines and Thailand before the crisis in July. We were overweight in some Latin American and Eastern European markets. Now as values emerge in Asia, we are hoping to pick up bargains. We are not overly concerned that some currencies or markets may fall another 5% to 10%. You can never buy at the absolute bottom. The way we see it, they are very close to bottom.

Outside Asia, what other emerging markets look good now?

Latin America has had a good run and economic fundamentals are sound, but all the optimism is already priced into the markets. The earnings story is still positive in Mexico, Brazil and Argentina and inflation is under control, economic growth is pretty strong. But markets are starting to look pretty expensive [compared to] bombed-out markets in Asia. Brazil, which historically trades at price-to-book ratio of 0.5, is now at 1.1. In Eastern Europe we are still positive on the Czech Republic and Poland; valuations are still attractive and earnings growth very strong. Russia was up more than 300% last year and over 200% this year. It's hard to buy a market that's come this far this fast. In Eastern Europe the story is reform and privatization; we are still seeing the benefits of that.

Sources: Datastream, Morgan Stanley