EM Value - Is Now The Right Time?

August 2018
Ernest Yeung , Portfolio Manager

FOLLOWING THE EM RALLY IN 2017, HAVE INVESTORS MISSED THE BOAT?

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.

WHICH AREAS OF EM DO YOU FIND INTERESTING TODAY?

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.
 

WHY SHOULD INVESTORS CONSIDER VALUE-STYLE INVESTING IN EM?

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.
 

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