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valuewalk.com /2014/02/emerging-markets-have-diverged/
Michael Ide
Screening for low risk EM countries that have already been pummeled by tapering fears could identify undervalued
EM assets
Now that emerging markets, especially those with current account deficits, have started to stumble due to concerns
about the effects of tapering and rising US Treasury yields value, investors are looking for assets that got caught up
in the panic and which may now be undervalued. Societe Generale analysts Paul Jackson and Ida Troussieux have
tried to answer this question with a two pronged approach. First, they use five criteria to determine which emerging
market countries present the most macro risk, then they look for asset classes in low-risk that look like they have lost
more value than you would have expected and could be ready for a rebound.
Building on the work of their colleague Daniel Fermon, they look at private sector debt, housing prices, financial
stability, inflation, and governance to determine macro risks. China immediately jumps out as having a lot of macro
risk, with a risk of property bubbles, high private sector debt, credit growth that outstrip GDP. Some other Asian EM
markets like Thailand, Malaysia, and Hong Kong are similarly at risk.
Foreign reserves can provide stability for a countrys banking system, but there is a cost to holding assets with such
low returns, so it follows that there is an optimal amount of foreign reserves relative to GDP, and Fermon figures that
China is probably just past the optimal level of holdings.
We identify the following assets from low-risk countries that have suffered too much: equities in Chile and Korea and
the currency of Taiwan. High-risk country assets that have escaped lightly are: equities in India and Russia
(Argentina could also be added) and the Chinese yuan, they conclude.