Attractive valuations spark search for BRIC bargains

LONDON/RIO DE JANEIRO: The biggest drop in emerging-market stocks since October 2008 is giving money managers the chance to find bargains in world-class companies from Sao Paulo to Moscow that are leading their peers in profit growth. Itau Unibanco Holding SA, Latin America’s largest bank by market value, trades at a 75% discount to Wells Fargo as analysts say the Brazilian lender will increase profit three times faster. Tata Motors’ price-to-earnings ratio is 23% less than Volkswagen’s even though profits at the Mumbai-based maker of the world’s cheapest car are rising twice as fast. OAO Rosneft, Russia’s largest oil producer, is valued at the lowest on record versus Canada’s EnCana.

The rout that pushed down the MSCI Emerging Markets Index 9.2% last month, driven by concern Europe’s debt crisis will slow global growth and developing-nation earnings, left many companies undervalued, according to BlackRock, Morgan Stanley and Templeton Asset Management. Low debt levels will help emerging economies to grow 5% a year even if Europe and the US shrink, Ashmore Investment Management said. “The selloff was indiscriminate,” Ivo Kovachev, a senior emerging markets money manager in London at JO Hambro Capital Management, which oversees about $6.3 billion, said in a June 1 interview. “Often good companies went down together with the worse ones.”

Earnings Growth

Tata Motors shares climbed 0.6% on Friday and Rosneft advanced 1.5%, while the MSCI emerging index slipped 0.2% at 11:35 a.m. in London. Emerging-market stocks were upgraded to “overweight” from “underweight” at HSBC Holdings, which cited “very attractive” valuations in countries including Russia and Brazil in a research report today.

Profits for companies in the MSCI emerging gauge, which includes the so-called BRIC nations of Brazil, Russia, India and China, will climb about 30% this year, according to more than 2,000 analyst estimates compiled by Bloomberg. MSCI World Index companies are projected to report a 25% increase in earnings.

Buying Opportunity

Brazil’s Bovespa index fell 8.2% this year, while the MSCI China Index of Hong Kong-traded shares slid 8.9% and India’s Bombay Stock Exchange Sensitive Index retreated 2.5%. The Russian Micex Index declined 1.4%. “In the very short term if people are foolish enough to sell some emerging markets, great,” Jerome Booth, who helps oversee about $33 billion as the London-based head of research at Ashmore, said in a May 25 interview. “It’s a buying opportunity for us.” Emerging markets may be the hardest hit should the European debt crisis and the threat of increased financial regulation in the US spur investors using borrowed money to reduce holdings of assets they consider riskier, according to HSBC Private Bank’s Arjuna Mahendran.

Mobius Bullish

Pacific Sun Investment Management’s Andy Mantel says shares of China Green Holdings are attractive after the Hong Kong-based supplier of fruits and vegetables sank 17% last month. The company has an estimated price-earnings ratio of 9, compared with an average of 23 for its global peers. The shares are 30% undervalued, according to the average of five analysts’ price estimates compiled by Bloomberg.

“It’s very cheap,” Mantel, the Hong Kong-based founder and managing director of Pacific Sun Investment, said in a May 25 interview with Bloomberg television. His China Mantou fund outperformed 88% of peers the past year, Bloomberg data show. Templeton Asset ‘s Mark Mobius says developing-nation equities are still in a bull market and declines spurred by Europe’s debt crisis are providing opportunities to buy. “We want to be invested,” Mobius, who oversees about $34 billion as chairman of Templeton in Singapore, said in a May 26 interview. “The fundamentals are much better than people realise.”

Itau, Wells Fargo

Emerging-market debt as a percentage of gross domestic product is estimated to reach 39.6% this year, near 2007 levels, while the ratio in the US will surge to 93.6% in 2010 from 61.9% in 2007, the Washington-based International Monetary Fund forecast in November.

Dan Tubbs, BlackRock’s emerging markets money manager, said he’s been purchasing shares of Brazilian financial and consumer companies and may increase positions in China and Russia. Itau was the fifth-largest holding in the BlackRock Emerging Markets Fund at the end of April.

“You’ve got better earnings growth and cheaper valuations,” Tubbs, who helps oversee about $2 billion in London, said in a May 21 interview. “Markets will tend to rise to reflect the improving fundamentals of the economy.”

Itau, based in Sao Paulo, has dropped 9.6% this year, compared with a 7.5% gain at Wells Fargo. Analysts project profits at Itau will increase at an annual rate of about 17% for the next three to five years, compared with 5.3% growth for Wells Fargo, Bloomberg data show.

Nano Sales

Itau’s PEG ratio, which compares a stock’s price-earnings ratio with projected profit growth, is 0.7 versus 2.7 for San Francisco-based Wells Fargo, according to data compiled by Bloomberg. JPMorgan Chase of New York upgraded Itau to “overweight” from “neutral” last month, citing an attractive valuation, higher profitability than peers and a “leading franchise.”

Tata Motors is valued at 14 times earnings estimates and is forecast to increase profit by 145% this fiscal year. That compares with a price-earnings ratio of 18 for Wolfsburg, Germany-based Volkswagen, where earnings may climb 52%, the average of analysts’ estimates shows.

Tata Motors said on June 2 it opened a plant for the $2,500 Nano model that will help clear a backlog of orders in India, where the government estimates car demand may more than double to 3 million annually by 2015 as the economy expands and incomes rise. Tata Motors shares may climb 14% in the next 12 months, according to the average of 35 analysts’ estimates compiled by Bloomberg.

‘Excellent Opportunity’

“It has enormous upside,” Seth Freeman, chief executive officer at San Francisco-based EM Capital Management, said in a May 28 interview with Bloomberg Television.

Rosneft’s earnings are poised to rise about 50% this year while Calgary-based EnCana’s retreat 50%, according to the average of analysts’ estimates. Analyst Matthew Thomas of New York-based Morgan Stanley wrote in a May 25 research report that recent declines provide an “excellent opportunity” to buy shares, with his $10 price target 39% higher than yesterday’s closing level.

Shares of Moscow-based Rosneft are a top pick of Morgan Stanley’s chief Asian and emerging-market strategist Jonathan Garner, who recommended adding to Russian holdings last week.