CARSON BLOCK: We Don't Realize How Deep We're Stuck In Tanking Emerging Markets
Block has warned about the risks in emerging markets countries like Brazil, Egypt, Turkey and South Africa.
Now, with EM seeing its largest outflows in years, Carson believes markets are not pricing enough risk into public companies that have "poured shareholder money into emerging markets."
We believe both the companies themselves and the analysts covering them have made overzealous assumptions about the safety and the expected earnings growth for these acquisitions. In the United States, too many analysts price growth at high multiples without thinking about where that growth is coming from. Many companies have made acquisitions that we think will ultimately generate returns lower than those of local market bond yields. In these situations, management would have actually created more value for shareholders by just buying local currency government bonds. What is more, many of these acquisitions were purchased by issuing debt in United States dollars and failing to hedge the currency exposure of the emerging market country – essentially doubling down on their bet.
The markets have not reflected many American companies high EM exposure, Block argues, but investors would be wise to keep it in mind.
He's been right many times before.