Why All the Macro Gurus Are Betting on Emerging Markets

- By Bram de Haas

I frequently go over recent Guru trades to see what some of the savviest investors on the planet are buying. Usually, there is an idea or two I want to check out more carefully. Worst case scenario, there's a lot to learn from how these men and women think, best case scenario, you find an idea that fits very well with your style.

This time I couldn't help but notice Paul Tudor Jones (Trades, Portfolio), George Soros (Trades, Portfolio), Louis Moore Bacon, Stanley Druckenmiller, Charles Brandes (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) all are buying the iShares MSCI Emerging Index. Five out of six are the most prolific macro traders you can find, but Brandes, who's more of a traditional value guy, is somewhat of a surprise.

• Warning! GuruFocus has detected 4 Warning Sign with SSNLF. Click here to check it out.

• SSNLF 15-Year Financial Data

• The intrinsic value of SSNLF

• Peter Lynch Chart of SSNLF

What are they betting on here?

MSCI Emerging Markets grants exposure to 23 emerging markets. China, South Korea and Taiwan make up over 50% of the portfolio. The index contains about 800 stocks but the top 10 holdings include Samsung Electronics (SSNLF), Bank of China (601988.SS), China Mobile (CHL), Hong Hai Precision and Alibaba (BABA).

Table (ticker, company, industry, geography, weight):

005930	SAMSUNG ELECTRONICS LTD	Information Technology	Korea (South)	3.67
2330	TAIWAN SEMICONDUCTOR MANUFACTURING	Information Technology	Taiwan	3.50
700	TENCENT HOLDINGS LTD	Information Technology	China	3.50
BABA	ALIBABA GROUP HOLDING ADR REPRESEN	Information Technology	China	2.62
941	CHINA MOBILE LTD	Telecommunication Services	China	1.65
NPN	NASPERS LIMITED N LTD	Consumer Discretionary	South Africa	1.61
939	CHINA CONSTRUCTION BANK CORP H	Financials	China	1.57
BIDU	BAIDU ADR REPTG INC CLASS A	Information Technology	China	1.19
1398	INDUSTRIAL AND COMMERCIAL BANK OF	Financials	China	1.11
2317	HON HAI PRECISION INDUSTRY LTD	Information Technology	Taiwan	1.01

Data: iShares

Having to guess what the gurus' motivations really are, the trade may be primarily driven by valuation. Without a severe crash, China has been fighting headwinds for several years. Many other emerging markets are suffering because of low oil prices as countries like Russia and Brazil are greatly dependent on black gold to fill their coffers.

As per Morningstar:

The average difference in trailing 12-month P/E ratios for the MSCI World Index relative to the MSCI Emerging Markets Index was 2.7, showing that emerging markets tend to trade at a lower valuation than developed markets. At the end of August 2016, the difference was 5.0, indicating emerging-markets valuations relative to developed markets are currently lower than their trailing 10-year average.

Currently, the iShares MSCI Emerging Market ETF trades at a level that corresponds to an average Price/Forward Earnings ratio of 11.57x, while the MSCI World Index sports a 17.2x average ratio. A difference of 5.36x or in other words the MSCI Emerging Markets ETF trades at a discount of 33% to the MSCI World Index. The S&P 500 trades at a 18.5x multiple even.

With the valuation gap quite a bit above historical averages, it looks like they are betting on a reversal to the mean here. Not a bad idea as there isn't a real good reason why the MSCI World should trade at such a sizeable premium. Over the long term, the market is a weighing machine and a dollar earned weighs the same, no matter where you weigh it.


Disclosure: Author owns none of the stocks mentioned.

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This article first appeared on GuruFocus.

• Warning! GuruFocus has detected 4 Warning Sign with SSNLF. Click here to check it out.

• SSNLF 15-Year Financial Data

• The intrinsic value of SSNLF

• Peter Lynch Chart of SSNLF