Bloomberg News

Emerging Stocks Have Gotten Expensive, Herro Says: Tom Keene

June 15, 2011

June 15 (Bloomberg) -- Emerging-market stocks are expensive, reducing their allure even as developing economies are poised to keep fueling global economic growth, said David Herro, chief investment officer of international equities at Harris Associates.

“Money has flooded into these areas, thereby making stocks in emerging markets relatively less attractive than those of developed markets,” said Herro today on Bloomberg Television’s “Surveillance Midday” with Tom Keene and Ken Prewitt. “The growth story isn’t over, but the stock story has taken a pause because of valuation.”

The success of emerging-market stocks in recent years sparked an inflow of investment that has equities expensive compared to stocks in developed markets, said Herro, Morningstar Inc.’s international stock fund manager of the decade. Despite the high valuation of their equities, emerging markets will drive global economic growth for the “next generation or two,” he said.

The MSCI emerging-market index gained 74 percent in 2009 and 16 percent in 2010. This year, the index has lost 2.3 percent. By comparison, the MSCI World Index rose 27 percent in 2009 and 10 percent in 2010. The index of developed-market shares is little changed this year.

China remains attractive more as a market for non-Chinese companies than for those based in the world’s second-largest economy, Herro said. The country’s central bank has taken “responsible” actions to combat inflation while not harming its longer term growth prospects, he said.

Large China-based companies have become expensive, a problem compounded by being government controlled, he said.

“The larger H-shares are really wards of the state,” he said. “They’re not companies that have boards that are sitting around thinking how to make money for the owners.”

Herro said he prefers European companies with operations in China. He cited Danone, Diageo Plc, Nestle SA, Daimler AG and Bayerische Motoren Werke AG as having “good exposure to China.”

“It’s a better way to play it in our view.”


To contact the reporter on this story: Leon Lazaroff in New York at

To contact the editor responsible for this story: David Papadopoulos at

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