EM Value - Is Now The Right Time?

August 2018
Ernest Yeung , Portfolio Manager


I do believe this is the right time to be fully invested in emerging markets. I would point out that in many parts of the world, mainly in the developed market, we are late cycle in terms of the macro for most countries.

However, in emerging markets I think we're early to mid-point of the cycle. I would point out the fact that what brings emerging markets down in the past is reckless spending. However, if you look at capex as a percentage of sales we are at a 15-year low today.


So I would point out we're at the point of the cycle when everyone is very disciplined in their investment and in their spending. To me that's a signal that we're in early to mid-part of the cycle. We're not anywhere near the latter part of the cycle in emerging markets.


I tend to look at neglected, forgotten pockets of the world to invest in, so today I think that there are many, many pockets like that. I would point out South Africa. The market has gone up a little bit since the change of politics with Mr. Ramaphosa coming in, but if you look at the stock and earnings and profitability versus history I think it's still very depressed, and valuation is reasonable even after a recent rally. South Africa is one that I would point out.


Another one that I would point out is actually the Middle East, a lot of these oil exporting countries. If you look at their stock valuation it's near a historical low. However, we know that oil price today is up to US$80, nearly US$80. However, these stocks have not moved. To me that's a disconnection.


I'll answer it in two ways. In the short term, I believe the performance of emerging markets in the last two years has focused in a very narrow group of companies, mainly the new economy, high tech pockets of emerging markets.


However, if I'm right on saying that emerging markets are new -- are in the early or mid-part of cycle – I think a lot of the positive in terms of recovery of profitability, improving return will appear in the older economy sectors. When that happens we believe the incremental dollar will move into the small value, old economy sector and close that valuation gap.


Secondly, value investment styles tend to work when there's inflation and where there's interest rate gradually move up. We are seeing that in many pockets of emerging markets.  For example central eastern Europe, China we are seeing inflation to come back, so I am confident that in those pockets value style will start to work.

Key Risks - The following risks are materially relevant to the strategy highlighted in this material:


Transactions in securities denominated in foreign currencies are subject to fluctuations in exchange rates which may affect the value of an investment. Returns can be more volatile than other, more developed, markets due to changes in market, political and economic conditions. Investments are less liquid than those which trade on more established markets. The strategy has increased risk due to its ability to employ both growth and value approaches in pursuit of long-term capital appreciation.



This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.