Emerging market jitters can be traced to valuations

Lay off the Chinese and dont blame former Fed chairman Alan Greenspan.

The international bout of equity jitters and the renewed vulnerability of emerging markets can largely be traced to over-extended valuations, profit-taking and geo-political reaction to events in Iran.

Thats the message to investors from Imara Asset Management South Africa (IAMSA), a member of the Imara financial services group and an adviser that has counselled increased investor vigilance since the beginning of the year.

IAMSA chief executive officer Dave Eliot notes: Dont blame it on the Chinese or for that matter on mixed US economic numbers, though the media seemed to misquote Alan Greenspan and the R (recession) word.

Look to the Middle East and Iran in particular coupled with months of rising equity prices. Not only was profit-taking due, it was overdue.

Iran will remain right up there as a most important element in the minds of investors and speculators as to the direction, albeit short-term, of global markets.

On the issue of equity valuations across emerging markets, Eliot shows that some key price-to-earnings ratios have been moving out of synch with more developed markets.

Between the end of August last year and early March, the average P/E in Hong Kong moved from 12.3 to 14.5 while the average in South Africa rose from 14.2 to 16.2. In Germany, the P/E average retreated from 13.6 to 13.1 while the UK was steady at 13.5 for the period. Similar steadiness (at 17.2) was evident in the US.

Eliot advises: Despite good share price rallies over the past months, the large first world markets remain reasonably priced certainly not a case of top of the bull market stuff!

On the other hand, emerging markets are somewhat over-extended. Corporate profit growth needs to remain good to sustain price rises. Investors should watch this point very carefully.