Rebecca Jones investigates whether the recent emerging markets sell-off provides a value opportunity or if, in fact, assets are cheap for a reason.
Emerging markets have taken a battering of late as fears over the withdrawal of quantitative easing (QE) in the US have sent investors in the region heading for the hills. In the six months to 28 August, the MSCI Emerging Market index shed an eye-watering 14.2%, while the MSCI World index notched up a 4.2% gain (see chart 1 on next page).
As a halt to the inflow of cheap dollars looms, emerging market currencies also suffered heavy losses, with the Indian rupee, Indonesian rrupiah, Turkish lira and Brazilian real all hitting multi-year lows against the US dollar. This stampede out of emerging markets is, for many fund managers, a worrying trend and has led to sell-offs in even the most daring of portfolios.
However, as assets become increasingly cheap, more contrarian managers are viewing others’ reluctance to buy as an opportunity. “There is no doubt there are problems in emerging markets at the moment but I’m looking at it as a long-term opportunity. When you get a big sell-off, that’s exactly the time to buy,” argues Neil Birrell, manager of the Premier Diversified fund.
Is the region cheap for a reason?
Birrell’s is the typical cry of the value investor and it is echoed by John Ventre, head of multi-manager at Old Mutual Global Investors. “We tend to be fans of unpopular assets. Building positions in assets while they’re unpopular and then selling them when everybody likes them again is, we think, a very profitable strategy,” he claims.
To prove their point, both managers highlight the current price to earnings (P/E) ratio of the MSCI Emerging Market index compared to that of the MSCI World: 11.9 to 16.9.
Forward ratios seem even more promising, with MSCI predicting a P/E of 9.6 in emerging markets come July 2014, compared to 13.7 in developed markets. As promising as these figures are, neither Birrell nor Ventre advocates taking a broad- brush approach. “Increasingly, ‘emerging markets’ is too general a term as we’ve seen such extreme divergence.
ASEAN countries are currently trading at rich valuations, while China is uniquely cheap and the outcomes could be just as different,” Ventre says. From a value perspective, the manager adds that China “stands out a country mile” as it is not, he claims, set for the slowdown many have predicted. “Chinese equities are priced for a significant and a serious growth slowdown but, when we pick through the data, we don’t see it,” he says.
With prices where they are, any upside surprise in growth could lead to significant gains, he adds. However, some remain unconvinced that cheap valuations are enough to tip the scales back in favour of emerging markets, including Schroders’ multi-asset manager Patrick Brennan.
“It’s starting to get really interesting from a valuations perspective but we don’t see valuation itself as a trigger for turning the market positive,” he argues.
Brennan currently has almost no emerging market exposure and says economic data, particularly exports to developed markets, would have to pick up before he would re-invest in the region. Others, including Henderson’s head of multi-asset Bill McQuaker, do not even see value opportunities in emerging markets yet.
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