The more upbeat picture has led some fund managers such as Blackrock to move to an overweight position in EM equities. The theory is that the Federal Reserve seems to be taking a more dovish tone on rate rises while crude oil prices have rebounded to $50 a barrel, although it is unlikely they will revert to $100 a barrel anytime soon .
“EM equity prices are attractive, trading at a 24% discount to their developed-market peers and fundamentals could further improve as companies focus on controlling expenses and targeting profits over market share gains,” says Richard Turnill, global chief investment strategist at the asset manager.
As for opportunities, George Iwanicki, emerging markets macro strategist at JP Morgan Asset Management is discerning. “For a long time emerging markets looked like a value trap but now we are seeing opportunities. They are not dirt cheap but reasonably cheap with a more favourable trend in earnings although it is still early days. In general, he favours Russia over Brazil
because the local valuations have remained consistently less expensive with the Brazilian real having rapidly rallied from its oversold lows of several months ago.
“Mexico is looking more interesting from a value perspective because the peso has done poorly and is starting to look cheap. It’s not a petro currency but you would think rebounding energy prices would be a positive for the currency, although it hasn’t yet,” he adds. “The demographically well-endowed India also presents an appealing growth story given the passage of the GST, but the big question is whether the significant valuation premium is merited.”
Prashant Khemka, chief investment officer (CIO) EM equity at Goldman Sachs Asset Management (GSAM), on the other hand, focuses on stock selection. The main criteria are sound businesses that have strong competitive advantages and corporate governance frameworks that can deliver sustainable superior returns over a business cycle.
While there is no overweight position, there is a higher allocation to mid-caps and holdings in sectors such as stock exchanges and consumer discretionary which includes media,
retail and outsourcing.
“It is important to distinguish between the macro and micro environment,” Khemka says. “This will differ depending on the country but at the risk of generalising, we avoid state owned enterprises because they typically have poor performance over time and do not represent the interests of minority shareholders.”
Julie Dickson, investment director at Capital Group also favours a bottom-up and not topdown approach to EM investing and is selectively looking at China. “The country has been as much an area of disappointment as it has been one for opportunity. The country is still growing and although we look at each company, we see opportunities in the consumer, IT, industrial and healthcare sectors. This is not just limited to those based in China but also exposed to the country.”
The investment case is also strong on the debt side, according to Jan Dehn, head of research at Ashmore Group. He argues that the relative and absolute valuations in EM are compelling
after years of selling by asset allocators as they have chased QE-sponsored developed market assets. “Investors will get higher returns compared to DM bonds where 70% of government bonds and a significant share of corporate bonds now pay negative yields,” he adds.
“Also, the relative fundamentals are stronger in that EM countries are growing at a faster rate than DM countries where the impetus of QE is fading and there are still underlying
issues of high debt and low productivity.”
