Betting on or against EM with S&P 500 stocks

On the one hand, emerging markets are an absolute wreck and it does not look as though things will soon be improving. Governments, in many cases, were happy to binge on spending while easy money poured in from foreign lands, and now that it is ebb-tide and the ocean of cash is receding, it is apparent that few steps were taken by these countries to prepare.

Global investors have been quite prepared, however. Valuations for US stocks with heavy EM exposure are already selling at a plump discount relative to the rest of the market. If you’re a trend follower, you may be inclined to short these names further on a bet that this continues. If you’re a contrarian and looking for long-term values amid the rubble, you’re likely scouting out these EM-exposed names for a bargain or two.

Merrill’s Equity and Quant Strategy team, led by Savita Subramanian, has a list for you regardless of which camp you fall into. They calculate that the S&P 500 has about 14% revenue exposure to emerging market countries overall.

For the bears…

If EM weakness continues in the near-term, some names may have more pronounced downside risks. Here we looked for stocks with at least 25% exposure to EM sales with the following criteria:

Stocks with deteriorating 3-month earnings estimate revision trends since October 2013;

• Overweight relative to the
S&P 500 in active US large
cap mutual funds;
• We exclude BUY-rated
stocks

short

and for the bulls…

Bottom fishing: for investors looking for beaten down names that may be bottoming, we looked for stocks with at least 25% exposure to EM sales with the following criteria:

Undervalued: no multiple expansion on Price to Sales since 2010 / companies where sales growth
outpaced performance since 2010;

• Stocks with improving (less
negative or more positive)
3-month earnings estimate
revision trends since
October 2013;
• Underweight relative to the
S&P 500 in active US large
cap mutual funds
• BUY or NEUTRAL rated
stocks

bottom fish

As the Greek ruling class said to Socrates, pick your poison.

Source:

Don’t Call it a Pullback
BofA Merrill Lynch Equity and Quant Strategy
February 3rd, 2014

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