Last week’s “Behind the Markets” podcast highlighted two of the more beaten-down regions on a pure asset price and valuation basis today: Japan and emerging markets. The overlap between the two is that Japan, in local currency terms, trades with volatility levels not so different than standard emerging market countries, with a large beta to global growth prospects given two-thirds of the country’s profits come from global markets. Edward Cole, portfolio manager at Man GLG, and Jesper Koll, CEO of WisdomTree Japan, were on the show to discuss these topics.

My friend and co-host Wes Gray sent in skeptical questions about the marginal portfolio diversification benefits of emerging markets, and Professor Jeremy Siegel started the case with this opinion:

  • Yes, emerging markets have a beta to global equities and growth greater than 1 such that they are riskier, but that is reflected in their price—and they have an 11 to 12 price/earnings ratio and therefore a 9% earnings yield, which means you are paid for taking those risks compared with, say, the U.S. markets and developed markets at higher prices.
  • Further, the developed world is growing at 1% to 2% at the boundary of prospects for growth while the emerging markets are playing catch-up with the developed world and can grow faster. This does not mean the per capita catch-up will happen in a smooth line, but Siegel sees this benefiting companies that serve emerging market consumers during the catch-up period.

    • One of the big questions and risks for global markets has been the global trade war dynamics between the U.S. and China. The China A-shares market was down 30% year-to-date ahead of Friday’s conversation and move. Cole pointed out that many Chinese companies with more than 50% revenue abroad were down for entirely “domestic” factors despite being levered to the U.S. housing cycle.

    Panic in A-Shares Market Creates Opportunity

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