Emerging-Market Stocks Cut by Nomura on Valuations

(Bloomberg) -- Emerging-market stocks were cut to “underweight” by Nomura Holdings Inc. after surging prices pushed valuations above those in developed nations. Nomura halved its weighting for emerging markets within its global recommended portfolio to 7 percent from 14 percent, compared with a benchmark weighting of 8 percent, strategist Ian Scott wrote in a report dated July 31. Emerging-markets shares are trading at a price-to-book multiple of 1.9 times, compared with 1.6 for developed economies, Scott said.

The benchmark MSCI Emerging Market index has surged 51 percent this year, compared with a 14 percent rally in MSCI World index of developed stocks, as International Monetary Fund bailouts and government aid boosted optimism the worst of the financial crisis is over. Developing economies will probably expand 1.5 percent as a group this year, while developed nations will contract 3.8 percent, the IMF forecast July 8.

“There is little doubt that developing economies have emerged from the crisis with their underlying superior secular growth trend solidified in investors’ minds,” Scott wrote in the report. Nomura “doubts the gap in profitability will remain as wide as it currently is,” he said. Emerging-markets equity valuations show the risk premium for developing economies has declined to 140 basis points below developed markets from 250 above in January, according to data compiled by Nomura. “Our sense is that the current risk premium discount is a demanding one to sustain,” Scott said.

Old Mutual, GE
Nomura removed Old Mutual Plc, the biggest insurer in Africa, ICICI Bank Ltd, India’s second-largest lender, and MTN Group Ltd., Africa’s largest mobile-phone company, from its recommended global portfolio, Scott said. It added General Electric Co., the world’s biggest non-bank financial company, Aviva Plc, Britain’s largest insurer, Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, Wells Fargo & Co., the fourth-largest U.S. bank by assets, and Samsung Electro- Mechanics Co., a South Korean electronic-parts maker. U.S. stocks were increased to 49 percent from 42 percent in the global portfolio, the note said.