Monday, May 15, 2006

Blog of the Week: The Confused Capitalist

It's different this time ...

It's different this time ... that's always the siren call when a market of any sort has gained on, and on, for longer than anyone thought possible.

It was heard at the NASDAQ peak in 2000, and I'm sure in the tulip bulb mania too. While it is a sensible thing to consider - and to remember that more often that not it is a siren song - it isn't always. And I think that the emerging markets phenomenon is one of those cases, where there's a fundamental shift going on, possibly a change or modification to the old world order.

I've made the point several times on this blog that I think the US market in particular appears extended and certainly leading indicators have suggested that the excess liquidity flowing around the world have led to global asset inflation.

A finger is often pointed at the emerging markets, saying that this is a particularly risky market, and it has experienced outsized gains over the past three years, placing its stock valuations on par - in many key ratios - with US markets. This, some pundits say, is clear evidence that the overall market is overvalued and that emerging markets in particular are poised to tumble, when sense returns to the market.

Overall, I agree that many markets are high: I just don't agree that the emerging markets are the clear sign of this. Stock markets are like a reputation: it takes a long time to get one, but once it's in place, many people stop thinking about the market, and consider only its reputation. They start only seeing what was once there. I think this currently provides a benefit to the US markets, and a disservice to many emerging markets.

Many emerging markets have, over the past decade, opened their economies, freed their currencies, and placed their public finances on sound footing. Their companies are more robust than ever before, with modern management (trained in the US in many cases), and robust internal key ratios - like return on capital and equity, earnings growth and cash-flow, and so on. They are, in many instances, true peers to some of the best global corporations - or very close to it.

In the US, on the other hand, there is...

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