There has suddenly been a flurry of analysts calling the bottom of the emerging markets downturn. Emerging markets are now cheaper than in the 2008 crisis and the Asian financial crisis of 1997/8, as measured by average inflation adjusted earnings, according to FundExpert. Dominic Rossi at Fidelity says many investors appear to given up on emerging markets, which is precisely the point when more thoughtful investors should start looking for opportunities.
If you are feeling “thoughtful”, the following three stocks could help you play the rebound.
What better way to play the emerging markets rebound than buying a bombed-out mining stock like Anglo American (LSE: AAL)? Its share price is down almost 60% in the last six months alone, slashing its valuation to a shockingly low 3.86 times earnings. The yield is even more shocking at 12.65%. Clearly, something has to give. Slashing costs and shaking up management can only offer short-term relief, what it needs now is a sustained recovery in commodity prices.
I’m not convinced. When China emerges from its troubles it will be a very different beast, weighted towards consumption and high value manufacturing, rather than a commodity-hungry growth monster. I think commodities have further to fall, and so does Anglo American.
Global drinks giant Diageo (LSE: DGE) has disappointed over the last three years, after a heady run of acquisition-fuelled growth. Sales have also been hit by the Asia slowdown and currency depreciation, which have forced customers to trade down to cheaper local concoctions. Diageo has also been hit by the Chinese crackdown on extravagant gifting although a 15% rise in the share price over the last three months could signal better times ahead.
With earnings per share falling from 103.10p in the year to March 2013 to a forecast 89.48p next March, Diageo looks expensive at 21.5 times earnings. That is around 20% above its long-term value, surprisingly expensive given flat recent performance. The yield hardly lifts the spirits at 2.9%, covered 1.6 times. Emerging markets may be cheap, but Diageo isn’t.
HSBC On Hold
There are at signs of life at HSBC Holdings (LSE: HSBA), which has been punished for what investors previously saw as its strength: its exposure to China. Management has doubled down on that exposure, as it looks to establish itself as the go-to bank in Asia, while pulling back from regions where it has only a smaller presence. Cost cutting and a drop-off in fines and redress charges helped it post a hefty 32% rise in reported Q3 profits to $6.1bn.
Times are still tough and that looks set to continue with EPS forecast to fall from 52.08 this year to 50.37p in 2016. But I think HSBC is better placed to cash in on the new China economy than commodity stocks like Anglo American, and trading at a forecast 10.2 times earnings, the entry price looks good. Its yield of 6.2% is covered 1.4 times. If you want to play the emerging markets revival, HSBC looks the best bet of the three.