Emerging Markets To Buy, Avoid In 2014: Credit Suisse

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Investors should have modest expectations for emerging markets in 2014, following three years of underperforming developed markets and despite attractive valuations, says Credit Suisse's Global Emerging Market Equity Strategy report released Wednesday.

IShares MSCI Emerging Markets Index ( EEM ) offers 6% upside from current levels, the report says. Credit Suisse sees the upside limited by lower foreign inflow when the Federal Reserve stops juicing the U.S. economy with quantitative easing and a host of other obstacles.

EEM is down 7% year to date vs. gains of 26% by SPDR S&P 500 ( SPY ) and 14% byiShares MSCI EAFE Index ( EFA ), which tracks developed foreign markets.


The difference in emerging market growth over developed markets is expected to be the smallest in a decade, according to Credit Suisse. Corporate margins are shrinking because of rising wages. And foreseen strength in the dollar would dampen returns for U.S. investors.

Investors' best bets are overweighting China, Czech Republic, Hungary, India, Poland and South Korea, while underweighting Chile, Greece, Malaysia, Russia, South Africa and Thailand.

China's proposed reforms should resolve the three major issues that troubled the stock market over the past three years: slowing economic growth, risk of a financial crisis and risk of social instability. Economic improvement could lift valuations for banks, one of the worst performers of 2013. The reforms could reduce risk in the shadow banking system and regulatory uncertainties.

China's price-to-earnings ratio is at a 15% discount to emerging markets vs. a 10% premium on average the past 10 years.

Leading economic indicators in Central Europe -- particularly Czech Republic, Hungary and Poland -- indicate growth reacceleration. Manufacturing orders have expanded along with Germany's improvement in new capital goods orders. They're enjoying the largest trade surplus since the formation of the euro currency. Consumer confidence and retail sales are improving along with real wage growth.

What's more, Czech Republic and Hungary's P/E ratios hover near 15-year lows relative to the region. Poland's earnings are expected to grow 1.5% in 2014 after tumbling 28% in 2013.

India's Outlook

India's corporate earnings are expected to grow 18% in 2014 and 15% in 2015 vs. 12% and 10% for emerging markets overall. Consumption among low-income people should be strong thanks to rising wages, even though rising inflation and stagnant wages will dampen spending among middle-income consumers.

The country's trade deficit is improving as is the currency. India's P/E is trading at a 25% premium over emerging markets', which is in line with the 10-year average.

South Korea's 2014 earnings forecast has been revised upward from 12% to 22%, driven by globally recognized tech and auto exports such as Samsung Electronics and Hyundai Motor. Emerging market funds are more underweighted in South Korea than they have been since 2000, presenting room for growth.

The government has introduced reform measures to support consumption and the real estate market. "The Korean housing market has already seen its bottom in late 2012 and is set for a gradual recovery from 2014 onwards," Credit Suisse wrote.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: EEM , EFA , SPY

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