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When the EM Discount Looks Tasty

When investors sense that consumer behavior in emerging markets is changing, they tend to shoot first and ask questions later, potentially missing opportunities.

It's well known that such stocks trade at a discount. The MSCI World With EM Exposure Index, which tracks developed-world shares that rely on emerging markets for revenue, was valued at 16.4 times forward earnings at the end of June, one-third above the 12.2 times for the "pure" MSCI Emerging Markets Index.

The argument for the "Western" stocks is that while they have EM growth, they don't share the developing countries' poor corporate governance. So the likes of Apple Inc. and tobacco maker Philip Morris International Inc. deserve a premium, the argument goes.

What about spinoffs? Take Yum China Holdings Inc., once part of Yum! Brands Inc., and Imax China Holding Inc., which split from Imax Corp. two years ago. The subsidiaries account for about half of their parents' total revenue; in theory...