Stocks in emerging markets represent good potential

In my view, I believe that the US economy is going through a "slow-growth" period, rather than falling into a "double-dip" recession, with projected US GDP forecast at 2-3 per cent.

Meanwhile, the European economy does not look promising. The debt crisies in Portugal, Ireland and Greece are still worrisome and may spread to huge economies like Italy and Spain. But from the European Central Bank's (ECB) response to this difficult situation through its bailout package (bond-purchasing), investors believe this shows the ECB's commitment to solving the problems.

With these prolonged weaknesses, the US and Europe may face sluggish economic growth in the next 12 months. This will have an unavoidable negative impact on Asian exports, since Asian economies are dependent on exports to the US and Europe.  However, the impact on Asia will be lessened by continued strong growth in China and India, major new economic forces. China's GDP continues to grow at a steady pace. Although it is revised down a little, it still remains high at 8-9 per cent.

Moreover, there are several factors that are influencing Asian economies, led by China, in a positive way. Agri-food prices are in consolidation while fuel prices are stable. Only the gold price will remain high as investors lose confidence in US and Europe and therefore seek out safe-haven assets. The gold price increased from US$1,500 per ounce to $1,900, reaching its expected peak. I believe that the inflation surge is likely to peak and will be reduced soon. 

In general, I recommend investment opportunities in emerging markets. Even though the US and European economic uncertainty has an effect on the world economy, emerging countries are still top picks for equity investment. Apart from China, another good choice is Brazil, the largest economy in Latin America.

Why emerging markets equity? There are several positive factors. World stock markets have plunged on recession fears since mid-April until now. The current valuation in the P/E ratio is low compared to the historical P/E ratio, meaning stocks are cheap. If we consider the MSCI World Index's current P/E ratio, it is now below its 10-year average P/E ratio minus 1 standard deviation. Moreover, the current equity risk premium is higher than its 10-year average plus 2 standard deviation (higher equity risk premium means risk-adjusted returns will be better in stocks). Lastly, earning yield on stock is 2-3 times that of bond yields. If earnings yield exceeds bond yields, it is great time to buy stocks.

The P/E ratio of China H-Share stocks and Brazil stocks are now traded at 8x, and with a price/book value of 1.3-1.7x, much lower than their historical average and also lower than the so-called "Hamburger" crisis in 2008. Meanwhile, China and Brazil's EPS growth is projected to grow 20 per cent and 10 per cent, respectively. So these two stock markets are the most attractive with the highest potential upside.

For risk-seeking investors in emerging markets equity, China and Brazil in particular are alternative options to consider through mutual funds available in the market.

Picha Ratanatam is head of wealth management at TISCO Bank PLC. He can be reached at: www.tiscowealth.com