Emerging markets stocks at 35% discount

I’d be the first one to tell you to ignore the advice of this piece.

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Emerging-market stocks are trading at levels 35 percent cheaper than their 15-year average as rising profits and falling interest rates from Brazil to Indonesia buoy investor confidence.

While the MSCI Emerging Markets Index’s 9.7 percent gain from this year’s low on Oct. 4 lifted its price-earnings ratio to 10.3 from 9.7, the gauge is still trading below its mean since 1996, according to data compiled by Bloomberg. The measure jumped an average 35 percent after developing-nation policy makers began cutting interest rates in 2003, 2005 and 2008.

Investors pulled $26 billion from emerging-market mutual funds in the first nine months and the stock indexes sank about twice as much as advanced nations after Indonesia, Poland and Brazil raised interest rates. Now borrowing costs are coming down as policy makers seek to spur expansions at a time when export growth and inflation are slowing. The MSCI index may rise 30 percent in a year as record earnings outweigh Europe’s debt crisis, more than 17,000 forecasts compiled by Bloomberg show.

“You still have great relative growth advantages for a lot of the underlying economies and very cheap stocks,” David Donabedian, who oversees about $17 billion as chief investment officer at Atlantic Trust, said in a Bloomberg Television interview. “We’ll begin to see better performance out of the emerging markets over the next three or four months and the reason is we’re going to see some positive policy changes.”