Wednesday, August 10, 2011

How About A +51% Return Guaranteed For Investing Over One Year?

Amidst the panic and risk-averse mentality, I managed to detect some sobering commentary on emerging markets. Current valuations of emerging markets collectively has only happened 10% of the time over the 20 year history. If you put your money to work now, over 3 month you are likely to get +10.1%, over 6 month 26.2% and most significantly over 12 month a return of 51% (almost guaranteed as the hit ratio is 100%). Hit ration 100% means every time it gets to current valuation and you invested, 10 out of 10 times you get an average of +51% after 12 months.

What's in the Price - Asia/EM Equities (Morgan Stanley)
In a short note published overnight, Jonathan Garner provides an update on current valuation levels for Asia/EM equities (see attached for client approved note).    
Takeaways as follows:
  • The current MSCI EM forward PE of 9.4x has occurred only 10% of the time over a 20-year history on a monthly basis. Average returns 12 months after hitting this valuation level are +51.0% with a hit ratio of 100%.  Average returns 1, 3 and 6 months after hitting this valuation level are 0.4%, 10.1% and 26.2% with hit ratios of 56.5 %, 78.3 %, and 91.3 % respectively.
  • MSCI EM cumulative 50 day return is -9.3%, a 1 standard deviation event. Average 12m returns after hitting this level are +30.2% with a hit ratio of 75%.

  • Technicals: Oversold levels suggests positive returns 6-12 months out. MSCI EM current cumulative 50 days return is about -9.3%, which is a -1 standard deviation event.  Average returns 1, 3, 6 and 12 months after hitting this valuation level are 2.5%, 3.0%, 14.4% and 30.2% with hit ratios of 64.0%, 58.0%, 64.0% and 74.7%, respectively.

  • Target Scenarios: Garner’s MSCI EM 2011 bear case target of 940 is 10% below current levels. His bear case entails a combination of Chinese hard landing, US double dip, and acceleration of Eurozone sovereign debt crisis. His scenario-weighted price target of 1305 has 30% upside from current levels.

  • Sticking with country preferences – OW China, Russia, Brazil, Korea, and Malaysia. In a bear case scenario, however, China and Malaysia are most likely to be defensive.

  Sector Preference: He remains OW Energy, Materials and Financials.  However, should the environment develop into a bear case scenario oriented to DM growth disappointment, he would suggest maintaining a portfolio skewed to domestic demand (financials, telecoms and consumer staples and discretionary). 


Gabriel Ng said...

Hm, that assumes what's going on now is a "once in 20 years" type of event.

Adrian said...

Mr Dali,

Should we stay invested/ buy in now? Or should we wait & see how the cards play out first?

I'm surprised by the 100% hit ration for 51% upside return, I thought that no one's supposed to know the future (from books I read, I might have read the wrong books, they lean towards index investing)...

For small time investors, can you shed some light for us? In simple terms?

Thank you Mr Dali.