Itau, Tata discounts spark search for Bric bargains

The biggest drop in emerging-market stocks since October 2008 is giving money managers the chance to find bargains in world-class companies from Sao Paulo to Moscow that are leading their peers in profit growth.

Itau Unibanco Holding SA, Latin America’s largest bank by market value, trades at a 75 per cent discount to Wells Fargo & Co, as analysts say the Brazilian lender will increase profit three times faster. Tata Motors Ltd’s price-to-earnings ratio is 23 per cent less than Volkswagen AG’s, even though profits at the Mumbai-based maker of the world’s cheapest car are rising twice as fast. OAO Rosneft, Russia’s largest oil producer, is valued at the lowest on record versus Canada’s EnCana Corp.

The rout that pushed down the MSCI Emerging Markets Index 9.2 per cent last month, driven by concern Europe’s debt crisis will slow global growth and developing-nation earnings, left many companies undervalued, according to BlackRock Inc, Morgan Stanley and Templeton Asset Management Ltd. Low debt levels will help emerging economies to grow five per cent a year even if Europe and the US shrink, Ashmore Investment Management Ltd said.

“The selloff was indiscriminate,” Ivo Kovachev, a senior emerging markets money manager in London at JO Hambro Capital Management Ltd, which oversees about $6.3 billion, said in a June 1 interview. “Often good companies went down together with the worse ones.”

Earnings growth
Tata shares climbed 0.6 per cent on Friday and Rosneft fell 1.1 per cent, while the MSCI emerging index slipped 1.2 per cent. Emerging-market stocks were upgraded to “overweight” from “underweight” at HSBC Holdings Plc, which cited “very attractive” valuations in countries including Russia and Brazil in a research report.

Profits for companies in the MSCI emerging gauge, which includes the so-called Bric nations of Brazil, Russia, India and China, will climb about 30 per cent this year, according to more than 2,000 analyst estimates compiled by Bloomberg. MSCI World Index companies are projected to report a 25 per cent increase in earnings.

Stocks sank around the world this year on concern spending cuts by indebted European nations from Greece to Spain will erode demand for everything from Chinese manufactured goods to Russian oil. The MSCI World index fell 6.6 per cent from the end of December through yesterday and trades for 13 times earnings estimates, according to Bloomberg data. The emerging index lost 6.5 per cent and has a price-earnings ratio of 11.8, near the lowest level in 14 months.