The Forgotten Opportunities in Emerging Markets

Ernest C. Yeung, Portfolio Manager, Emerging Markets Discovery Equity Strategy

What is your outlook for emerging markets?

2018 has proven to be a volatile year for EM. A lot of people worry about US dollar strength, Fed rate hikes, as well as trade war with China. We think these events are important, but what’s more important is the fundamental improvement in a lot of EM countries. These cycles tend to last long and they’re unlikely to derail by short-term impact such as rate hike or US dollar strength. A lot of EM countries do not rely on US dollar funding and the situation is very different from five years ago.

Do valuations reflect current risks?

Overall EM’s valuation a lot of people will comment it as fair. It trades on 13 times P/E and it’s pretty in line to long-term history. I think within that, the asset class has a polarisation of two extremes. The new economy stocks are expensive, they are trading above their historical average; whereas in the more traditional old economy sectors, valuation is actually very cheap. There are sectors such as financials, energy, materials; they are trading at long-term low range of their historical range. So, as a value fund manager, I’m not short of ideas and there’s a lot of interesting valuation opportunity out there.

How is your approach different to other EM managers?

First of all, EM value space is neglected amongst mainstream investors. A lot of assets under management within EM is deployed in core and growth style of investing. Value is under-owned by most investors. But we are arguing valuation is cheap and fundamentals are improving in these sectors. Secondly, for our portfolio, we do not merely buy cheap companies. We actually look at forgotten stocks where people are not doing enough research. We believe T. Rowe Price has one of the largest emerging market research teams out there and it can enable us to discover a lot of industries and companies that are being under-researched and under-owned by mainstream investors.

Where are you currently finding opportunities?

One of the biggest opportunities for us right now is financial stocks in emerging markets. Financials as a sector is the second largest underweight amongst EM investors. Valuation is actually very cheap at one standard deviation below mean. We can explain that by the lack of loan growth in many countries. But if we’re right on our macro top-down view, that economic activity will accelerate into the next few years, capital spending will resume in many countries, then I think it’s just a matter of time before loan growth of financial sectors to come back.

And the second pocket I will highlight is countries such as South Africa. Right now valuation of South African domestic stocks is very cheap, expectation is very low, so it’s not pricing in any high expectation at all.

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. 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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