South Korean stocks are the latest casualty in a year that has seen developing-country stocks do more submerging than emerging.
The country's Kospi index, which includes such well known brand names as Hyundai and Samsung, sank 3.4 per cent on Monday following the death of North Korea's leader, Kim Jong-il.
For the year as a whole, the Kospi has fallen 13.4 per cent, while benchmark indexes in China, Hong Kong, Taiwan, India and Brazil have tumbled more than 20 per cent. After beginning 2011 as the favoured investment of many professionals, emerging market stocks are now regarded in many quarters as a highly risky play on faltering global growth.
But some big investors in emerging countries believe the market slide has gone too far. They argue that even if emerging markets encounter a slowdown, growth in developing nations will still outpace levels in the U.S. and Europe. While corporate earnings in countries such as South Korea, Brazil, China, India and Russia once depended on exports to the developed world, they are now getting more of a boost from domestic demand.
"When things go down, that's the time to be putting more money in, not taking it out," Mark Mobius, who oversees $40-billion (U.S.) as head of Templeton's emerging-markets group, said in an interview from Brazil. "At the end of day, it's about value, it's about dividends."
Warren Buffett, the billionaire U.S. investor, told CNBC television last month that he's looking to invest in large South Korean companies "with a sustainable, competitive advantage." Berkshire Hathaway Inc., Mr. Buffett's holding company, owned 4.6 per cent of the South Korean steel maker Posco at the end of last year, according to Berkshire's 2010 annual report.
At a time when Canada, the United States and most European countries are forecast to grow slowly or even shrink, China's economy is on track to expand between 8 per cent and 8.5 per cent next year, compared with an average rate of 9 per cent or faster for much of the past decade.
"Even though the short-term growth prospects may dim somewhat, [emerging markets]still have growth rates that are stellar relative to the alternative," said Paul Taylor, who oversees $14.5-billion in assets in Toronto as chief investment officer of BMO Harris Private Banking. "Maybe China slows from 9 or 10 per cent to 8 or 8-and-a-half per cent – that's still stellar. Euro-land is still in for a recession."
But investors should be aware of the risks. India is battling accelerating inflation, and Russian growth hinges on the prices it can get for its oil and gas.
Equity valuations vary widely among different emerging markets. Hong Kong's Hang Seng index has a price-to-earnings ratio of 8.2, near its lowest level in three years, but the Kospi, at 17.5, is near its priciest valuation since 2009. In comparison, the S&P 500 has a P/E of 12.7.
Political uncertainty is growing in many countries. This year was marked by protests in Russia over Vladimir Putin's plans to return as president next year, uprisings in China and now a change in leadership in belligerent North Korea that is raising anxiety levels in South Korea.
"Emerging markets offer high return with high risk, and a big part of it is the political premium," Mr. Taylor said.
Following Monday's decline, South Korea's Kospi was trading near a 10-week low. The 50 largest companies in the index all dropped. Samsung Electronics Co. lost 3.6 per cent, LG Electronics Inc. retreated 4.7 per cent, and Korean Air Lines Co. tumbled 7.5 per cent.
"Without question we would view [the selloff]as a buying opportunity, subject to how the politics plays out," Geoffrey Dennis, emerging-markets strategist at New York-based Citigroup Inc., said in an interview with Business News Network television.