While emerging market stocks have been touted for the last couple years as the investment du jour, the message at an Eaton Vance outlook event this morning was quite the contrary. Richard Bernstein, founder, CEO and chief investment officer of Richard Bernstein Advisors and a subadvisor for Eaton Vance, said he actually sees more risks in emerging markets now, and that investors should be looking to the U.S. for some attractive equity opportunities. Other speakers at the event did not have as positive an outlook for the U.S. as Bernstein, with heavy emphasis on the debt crisis in Europe and how the outcome there could great affect this country.
“Longer term, I actually think this is a U.S. decade,” said Bernstein, one of Registered Rep.’s Ten to Watch for 2012. “I know that sounds ridiculous given what we just heard.”
His reasoning: The S&P 500 has now outperformed equities in the BRIC countries (Brazil, Russia, India and China) for the past four years. Ten years ago, Bernstein said, everyone was focused on when technology stocks were going to come back, and no one was paying attention to such asset classes as emerging markets, gold, commodities, REITs, which were actually outperforming. The same thing is happening now with U.S. equities, he said.
“From our perspective, the valuation of U.S. stocks versus emerging market stocks, is almost exactly, almost to the decimal point, flipped from where it was 10 or 11 years ago,” Bernstein said.
In fact, 10 years ago, free cash flow yields in the U.S. were at 2 percent, versus 7 to 8 percent for the emerging markets, Bernstein added. Today, these numbers are flipped, and U.S. stocks are as cheap as emerging market stocks were 10 years ago. He believes the opportunities in the U.S. are immensely better than they are around the world.
Note: Bernstein is a sub-advisor to Eaton Vance Management. Eaton Vance manages several emerging markets mutual funds, including the Emerging Markets Local Income Fund (EEIAX), the Parametric Structured Emerging Markets Funds (EAEMX), and the Greater India Fund (ETGIX).
“It may end up being that we are the nicest house on a bad block, but that’s OK. That works.”
Bernstein said emerging market countries are stuck between a rock and a hard place, deciding whether to fight inflation or unemployment. These countries are also experiencing big credit bubbles. Brazil has decided to welcome inflation, with two quantitative easings in the last six weeks. Brazil has the third highest inflation rate in the world, and it’s time to be wary, he said. “My personal opinion is the Brazil we’ve known and loved for the past 10 years or so is something of the past.”
Meanwhile, India welcomed unemployment and decided to fight inflation, and the yield curve there is nearly inverted, the kiss of death for equity investors, Bernstein said. China has decided to fight both, but he said the credit bubble is much more pervasive there because the Chinese government has been so involved in so many levels of lending, he added. “If you didn’t like Fannie Mae and Freddie Mac’s role in the economy, then you can’t love China.”
On the other hand, the U.S. is actually a high-quality market, contrary to what many investors believe right now. The U.S. corporate sector has benefited from this recovery, Bernstein said, and it’s more superior to other corporate sectors around the world. The U.S. profits growth is more stable; estimate revisions are stronger; and they have more transparency in their balance sheets.
According to Eric Stein, vice president and portfolio manager, Eaton Vance global fixed income, the U.S. is not falling, but we could fall on a relative basis and may lose some of our standard of living relative to Asia.
“We’re still very good at entrepreneurship and at managing companies, things that emerging market countries aren’t as good at,” Stein said. “They have education systems that are a lot better teaching math and science, but they don’t teach individualism, risk-taking entrepreneurship, and ‘thinking outside the box.’”
