Buy Emerging-Market Stocks on Dip, Credit Suisse Says

(Bloomberg) -- Investors should buy emerging-market stocks amid declines this month because valuations aren’t expensive even after their gains this year, according to Credit Suisse Group AG. Shares in developing nations are trading at about 12.7 times reported earnings, just 5 percent higher than the levels seen at the start of previous rallies, Credit Suisse analysts Sakthi Siva and Kin Nang Chik said in a report. Global emerging market stocks may offer an “upside potential” of 25 percent in the next 12 months, they added.

The MSCI Emerging Markets Index has slipped 4.2 percent from this year’s high set on Aug. 3, trimming gains so far in 2009 to 46 percent. Indexes in developing nations account for all 10 of the world’s best performers this year, led by Peru, Indonesia and Sri Lanka, Bloomberg data show.“The starting point of this rally was more depressed global emerging market valuations,” the analysts wrote. “With August seasonally the worst month for global emerging markets, we suggest buying on the dips in August.”Emerging-market shares are trading at about 1.9 times book value, “marginally below” their historical averages, the Credit Suisse analysts said. Dividend yield of 2.7 percent is higher than their long-term averages, they added.

Economic Growth
Investors should buy emerging market stocks and sell equities in developed nations short because emerging economies will have faster economic growth and their shares are cheaper, Societe Generale SA said this week.The MSCI Emerging Markets Index trades at 13.86 times the bank’s 12-month earnings forecast, below the 15.89 multiple for MSCI’s EAFE Index of developed stocks, wrote Rebecca Cheong, senior equity derivatives strategist for Societe Generale in New York. Emerging economies may expand by 4.8 percent next year, compared with 3 percent for developed nations and 2.2 percent for the U.S., economists at the French bank estimate.

“Even after production improves from historically low levels, healthy consumer demand will still be needed for a real recovery, which has not yet” occurred in developed markets, Cheong wrote. “With little hope of immediate strong export pick- up, countries will need to rely on internal growth, which is more favorable for emerging-market countries based on recent retail numbers.”