Annual results
Positive view going forward
"In conclusion, the Board believes that there are compelling opportunities for investment in Emerging Markets, with dispersion between sectors at elevated levels and an attractive relative level of valuation compared to developed markets. We are confident that the focused and disciplined stock selection process adopted by the Investment Manager will continue to deliver attractive long term returns to shareholders"
...
"overall, we believe the portfolio remains well-positioned to deliver a healthy level of income to shareholders, while still participating in the ongoing growth and capital gains available in emerging markets" |
Latest paid research by Kepler |
Sold out of FSSS for same reasons looking overbought hoping to buy back in lower |
Interesting - Recovered back to the same level it was in April? 2013. Dolphinite you may well have been right in your decision. |
Sold out as seems to have run too far to quickly RSI overbought ,?but am usually wrong with timing |
Might be of interest :- |
Bit of a recovery here in recent weeks
Here's the latest piece of research by Kepler
JEMI is trading on a discount at the time of writing too which provides more outperformance potential in any future recovery.
We note that the team are currently projecting a very high five year expected return of c. 17% a year from their portfolio , based on their bottom up analysis. This is only a model of course, and has to be tempered with the risks to the short-term outlook which are hard to quantify (relating to war, international relations and related issues). Nevertheless, for investors with a long-term perspective this looks like it may prove to be a good long-term entry point. |
 Avoid US stocks: Emerging markets is where to put your money in 2019, says Morgan Stanley:
Stocks in emerging markets have had a rough year but are tipped for a turnaround, according to Morgan Stanley, which predicts stable growth in those economies in 2019.
The investment bank has upgraded emerging market stocks from “underweight” to “overweight221; for the new year, while US equities were downgraded to “underweight.”
“We think the bear market is mostly complete for EM (emerging markets),” the bank said in its Global Strategy Outlook report for 2019, adding: “We are taking larger relative positions and adding to EM.”
Many investors withdrew from emerging markets throughout 2018 and bought more assets in the US due to a spike in bond yields. That will change, says Morgan Stanley, explaining that emerging markets will outperform developed markets.
Within the emerging markets space, Morgan Stanley’s key “overweight221; countries are Brazil, Thailand, Indonesia, India, Peru and Poland. The bank classes Mexico, the Philippines, Colombia, Greece and the United Arab Emirates as “underweight.”
Growth across EM has been forecast to slow slightly from 4.8 percent to 4.7 percent in 2019, before inching back up to 4.8 percent in 2020. US growth will moderate from the 2.9 percent estimates to 2.3 percent in 2019 and 1.9 percent in 2020, Morgan Stanley said.
“A major challenge for US assets next year is that they’re ‘boxed in’ – better-than-expected growth will simply mean more Fed tightening, while weaker-than-expected growth will raise slowdown risks, with limited scope for policy support,” its strategists wrote. “In a major change from the last 10 years, both good news and bad news creates problems for US markets.” |
This seems at a low ebb, had my eye on it for a while. I've bought a few .
R2 |
The improved performance of the emerging world will be sustained:
At 3.9%, emerging -market growth in 2016 was the weakest since the Great Recession. Since then, the external environment for these economies has improved. In particular, growth in the developed world has picked up considerably and commodity prices have risen by more than 60% since the beginning of 2016. As a result, emerging -market growth rebounded to 4.8% in 2017. IHS Markit predicts this growth rate will be sustained in 2018.
While the global environment will continue to be growth -supportive, and while some countries will see stronger growth in 2018, other countries and regions will face challenges, and growing debt burdens could become a risk for many of these economies.
In Asia, India will recover from its twin policy shocks of demonetization and the imposition of the goods and services tax. At the same time Indonesia, Malaysia, the Philippines, and Vietnam will sustain 5.0‒6.5% growth. Most of the economies in Latin America will also see also better growth in 2018.
A wildcard in the 2018 outlook is whether the Chinese government will go to the stimulus well once again when growth slows. Thanks to stable labor market conditions, it appears that financial crisis prevention outweighs a moderate growth slowdown, in the Xi government’s current calculus. A moderate weakening in China’s growth momentum in 2018 thus appears to be in the cards. IHS Markit predicts that China’s growth rate will diminish from 6.8% in 2017 to 6.5% in 2018.
On the other hand, Emerging Europe will see slower growth, due to overheating and labor shortages. In the Middle East, the recovery from the oil slump will be slow and in Sub-Saharan Africa the big economies (Angola, Nigeria, and South Africa) will struggle to expand more 1%. |
Can emerging markets maintain their momentum? By Graham Smith:
When markets surprise, they have a habit of doing so in a big way. This wasn’t supposed to be a great year for emerging markets but, so far, it has been. The MSCI Emerging Markets Index went up by almost a third in US dollar terms over the ten months to the end of October¹.
Rising interest rates in the US have the potential to apply a substantial headwind to emerging markets. They make it relatively more attractive for global investors to plant their money in US assets and avoid the additional risks associated with smaller, developing countries. At the same time, higher US rates make it more expensive for nations dependent on foreign loans to service their existing debts and borrow more.
As always though, we find ourselves somewhere between two big pulls. On the other end of the rope this time is economic growth. In a developed world where growth of 2% to 3% is considered strong enough to withstand rises in interest rates, the International Monetary Fund’s expectation that emerging markets will continue to grow at a rate of about 5% per annum looks impressive².
So where is the growth coming from? For a start, China seems on course to expand by about 7% this year. While that’s a big step down from the 10% growth rate we saw earlier this decade, it’s still enough to belie some extraordinary progress. Online sales of physical goods were 29% higher in the nine months to September compared with the same period in 2016.³
That’s good news for the host of nearby countries that send exports to China. Malaysia, for instance, which sells components used in the latest generation Apple and Samsung smartphones, said last week that exports to China were up 27% year-on-year in September⁴.
Then there’s Brazil, in a much weaker position, but with prospects improving. Following a damaging two-year-long recession, a rebound in consumer spending stabilised the economy in the first half of this year ⁵.
India, almost the world’s fastest growing large economy in fiscal 2016-17, has slowed as the country absorbs the combined impacts of last year’s cancellation of high value bank notes and the introduction this year of a national goods and services tax. However, these effects are only expected to be transitory, turning positive for the economy longer run according to the World Bank⁶.
Since corporate earnings have broadly grown in step with stock market gains this year, emerging markets continue to look attractively valued on a relative basis. At the end of last month, the MSCI Emerging Markets Index traded on 16 times the earnings of the companies it represents, and at a 23% discount to world markets generally.
That valuation gap is more or less maintained when using forecast earnings – 13 times for emerging markets versus 17 times for the world⁷.
You could, perhaps, explain away these mismatches by the risks that remain. Capital has continued to flow into emerging markets, even as US interest rates have gone up. As in the period 2003 to 2006, emerging markets are enduring rising rates, partly because those rises have coincided with healthy global growth⁸.
However, that could still be undone by any factor that sees the US dollar returning to favour, particularly if that factor involves a rise in geopolitical stress or unexpected deterioration in the world growth outlook.
That would place renewed pressure particularly on countries with US dollar currency pegs and large debts. Malaysia would be one – its banks are highly dependent on dollar funding⁹.
As usual, investors seeking to add growth from emerging markets to their portfolios might do well to spread their risks. Fortunately, emerging markets are a heterogeneous mix, with commodity producers like Russia, Indonesia and South Africa included alongside the increasingly consumer oriented markets of China and India. |
UEM has better NAV performance over 5 years and only a slightly lower yield of 3% yet is on a discount to NAV of 10% (JEMI's is 0%).Even cheaper are the subscription shares UEMS -a backdoor way into the ordinaries at discount. See the UEM thread for background. |
Ian Cowie: I’m happy for Asia to climb ‘wall of worry’:
City cynics say the six most expensive words in the English language are: ‘It will be different this time.’ That’s worth recalling when this month marks the 20th anniversary of the 1997 Asian crisis, where a domino effect saw currencies collapse across the region and stock market shocks reverberate around the world.
For example, the Hang Seng Index in Hong Kong plunged 10% in one day that July and the S&P 500 index in New York slipped by 7% in a single trading session. Lest this seem a dreary tale about events far away and long ago, it’s wise to remember that China had not yet joined the World Trade Organisation back then but is now the second-biggest economy in the world, as measured by gross domestic product. In terms of purchasing power parity, China is already the largest economy in the world, according to the International Monetary Fund.
Coming down from the macro to the personal, like many investors who have diversified away from Brexit Britain and shrinking sterling, I have substantial exposure to Asia through Henderson Far East Income (HFEL) and Schroder Oriental Income (SOI) – two investment trusts yielding 5.4% and 3.5% respectively – plus JPMorgan Global Emerging Markets Income (JEMI), which yields 4%.
In addition to those attractive yields, all three have delivered decent total returns over the last five years since I began buying them; 76% at Henderson and 93% at Schroder with JPMorgan still somewhat under a cloud at 34%. The one-year figures are, respectively, 32%, 25% and 20%.
Then there’s my biggest single shareholding in the region, Baillie Gifford Shin Nippon (BGS), an investment trust specialising in Japanese smaller companies. This yields zip but has delivered total returns of 113% during the three years since I invested and 19% over the last year.
The bad news is that Asian economies are carrying bigger debt burdens now than they were in 1997. The good news is that less of it is denominated in dollars and most Asian countries enjoy bigger foreign reserve buffers today than 20 years ago.
Other significant differences across the decades include the increasing importance of domestic consumption, with the vast populations of China and India offering more potential for growth than anywhere else in the world, and less reliance on low added-value exports. This switch in emphasis is evident in the asset allocation of my Asian trusts.
For example, Henderson Far East Income and Schroder Oriental both feature Samsung Electronics – the South Korean giant and global rival to Apple in their top 10 holdings, alongside major stakes in – respectively –Bank of China and HSBC. JPMorgan Global Emerging Markets Income and Schroder Oriental both list Taiwan Semiconductor in their top 10.
Looking to the future, after four or five years of falling commodity prices and corporate earnings downgrades in the region, both trends have recently reversed and some analysts forecast double-digit earnings growth in 2018. True, we have heard similar talk before but the performance figures above speak for themselves and the dividends pay investors to be patient.
All things considered, I expect Asia’s bull market to continue to climb a wall of fear in the months ahead, rather than revisit the shocking plunge of July, 1997. History rarely repeats itself but, less comfortingly for those of us who are fully invested, it often rhymes. |
Turkey is heading for a default:
Emerging market stocks have rallied this year, but investors should be wary of getting over-enthusiastic, says Jonathan Compton in this week’s cover story. “Major sovereign defaults in emerging markets are as predictable as the seasons”, he says. They happen every couple of decades – which means that right now we’re overdue for another one. The last one was in Malaysia in 1997; the one before that was in Mexico in 1982. Jonathan’s in no doubt where the next one will begin: Turkey. His reasoning is sound enough: President Recep Tayyip Erdogan has all but come out and said that that is what he’s going to do. The trouble is that investors aren’t listening. But they should, says Jonathan. “Turkey matters”. In the late 1990s it was a market darling”, and for the last 40 years “its large, relatively stable economy has been a significant stabiliser in the region”. But now, it is “rapidly sinking into ever-darker waters, threatening contagion into other emerging markets.” |
...............Fund Bench-Mark Deviation
China...........20.0% 27.0% -7.6%
Taiwan..........16.6% 12.2% 4.4%
South Africa....12.4% 6.8% 5.6%
Brazil...........6.7% 6.9% -0.2%
Russia...........6.4% 3.4% 3.0%
South Korea......5.8% 15.7% -9.9%
Thailand.........5.8% 2.2% 3.6%
Mexico...........5.7% 3.5% 2.2%
Turkey...........3.7% 1.1% 2.6%
Czech Republic...2.9% 0.2% 2.7%
India............2.7% 8.8% -6.1%
Chile............2.7% 1.2% 1.5%
Hungary..........1.7% 0.3% 1.4%
Indonesia........1.6% 2.5% -0.9%
UAE..............1.4% 0.7% 0.7%
Malaysia.........1.0% 2.4% -1.4%
Saudi Arabia.....0.9% 0.0% 0.9%
Poland...........0.0% 1.2% -1.2%
Philippines......0.0% 1.2% -1.2%
Qatar............0.0% 0.8% -0.8%
Colombia.........0.0% 0.4% -0.4%
Peru.............0.0% 0.4% -0.4%
Greece...........0.0% 0.3% -0.3%
Egypt............0.0% 0.1% -0.1%
Cash.............2.0% |
Why It’s Time to be Overweight in Re-Emerging Markets - by Rob Bush:
In the romantic whirlwind of global investing, no lover, it seems, is more alternately courted and then spurned than the emerging markets (EM). At times, investors are besotted, showering the asset markets of developing nations with capital as their infatuation with higher yields and stronger growth blinds them to all faults. But, before we know it, there’s an indiscretion – a capital control here, a debt crisis there. The once beautiful prospect of a lifelong partnership dissolves as investors and markets part ways, in search of their next paramours.
However, here at Deutsche Asset Management, we believe that the time is ripe for investors to rekindle their relationship with emerging markets. At our most recent Chief Investment Office (CIO) day, we moved to an overweight on the region and, fortunately, we allowed our heads to rule our hearts. Here are the main reasons why we think EM should again warrant your affection:
Macro Stabilization – After a tough 2016 for one or two of the emerging markets, notably Brazil and Russia, we think that Gross domestic product (GDP) growth and commodity prices have stabilized. Indeed, when it comes to growth, China may even surprise on the upside with encouraging signs of improving industrial production, steady infrastructure spending, and a Yuan that has been remarkably stable since its jitters in the summer of 2015 and at the beginning of 2016.
Export Pick Up – Although our view is that many emerging economies are actually a little less reliant on net exports than may generally be assumed, we nevertheless see outbound trade growing faster than imports in a number of the larger exporters, including Korea, Taiwan, Thailand and Russia.
Earnings Growth – Our view is that earnings will likely grow at more than 10% over the course of the next year in the MSCI Emerging Markets Index, and that should help to drive our forecast for 1,000 in the benchmark by March 2018.
Discounted Valuations – We wouldn’t categorize emerging market valuations as distressed but rather as attractive relative to the US. Even after a strong start to 2017, the current Price-to-earnings (PE) ratio of MSCI EM is around 15.1 versus 22.2 for MSCI USA Index, a discount of more than 30%.
Monetary Policy – More emerging market central banks are loosening monetary policy than tightening. All things equal that ought to provide a boost to stocks by encouraging relatively underinvested local money to seek out riskier assets. Additionally, to the extent that lower rates in EM, coupled with a hiking The U.S. Federal Reserve (Fed), cause EM currencies to weaken that could provide a boost to corporate profitability. Furthermore, one of the classic risks that investors are concerned with in EM, that of too rapid a currency devaluation causing problems in meeting dollar liabilities, does not seem to have materialized post Trump’s election.
Furthermore, these reasons aside, there are two more that we have blogged on before that we think are worth reiterating.
The first is the surprisingly low volatility that emerging markets have exhibited over the last 16 years or so. Figure One shows the rolling one year volatility of the MSCI EM Hedged and USA equity indices. It certainly came as a surprise to us that the emerging markets index has actually been less risky than the US more than 75% of the time. We attribute this to the relatively low inter correlation of many of these markets. After all, the emerging market label includes a basket of some very disparate markets, which, though individually may be quite risky, apparently diversify well when pooled.
The other potentially appealing feature is the relatively low correlation that the emerging markets have exhibited to U.S. stocks over time. The average of the rolling one year correlations between these markets over the same period was 0.42 and the highest that it ever climbed to was 0.62 during the latter part of the financial crisis. This, don’t forget, at a time when correlations across asset classes generally were spiking and investors were clamoring for diversifiers.
So there you have it. Not perhaps, reasons enough to fall head over heels in love with emerging markets, but sufficient, we hope, to at least get your pulses racing. |
Strong services sector data and firmer oil prices pushed emerging market equities to fresh two-year highs on Monday, but Qatar stocks and bonds sold off after four other Arab states accused it of supporting terrorism.
MSCI's benchmark emerging equity index rose 0.3 percent after strong services sector data from key markets such as China, India and Russia.
Away from the Middle East, emerging markets performed well, with gains across stock indices and currencies, helped by the positive data and the rise in oil prices.
Softer than expected U.S. non-farm payrolls data on Friday has also tempered Federal Reserve rate hike bets, pushing the dollar to seven-month lows and in turn helping emerging currencies higher.
China's yuan advanced after the central bank set its guidance at a near seven-month high and Chinese services sector activity expanded at the fastest pace in four months in May.
Russian dollar-denominated stocks rose 0.8 percent and the rouble firmed 0.2 percent after Russian services activity maintained strong growth.
Indian stocks also hit a fresh record high with India's services firms creating jobs at the fastest pace in nearly four years. |
Can emerging markets keep up the pace?
Emerging markets have dramatically upstaged developed markets over the past year, and Neptune’s emerging market range has outperformed across the board. Here, members of Neptune’s emerging market team discuss the outlook for the asset class.
Emerging markets have significantly outperformed developed markets over the past year, and had their strongest Q1 since 2012
The asset class nevertheless remains cheap relative to developed markets, and on an absolute basis
The earnings outlook for emerging markets has greatly improved, supported by improving corporate governance and political reform – though there is still work to be done
The Neptune Emerging Markets, Neptune India, Neptune Russia & Greater Russia and Neptune Latin America funds are all comfortably ahead of their benchmarks over one and three year periods
There have been a number of false dawns for emerging markets in recent years; hopes of an economic turnaround have too often been quickly snuffed out by commodity price drops or shifts in market sentiment. In our view, however, it is clear that emerging markets are in the early stages of a cyclical recovery.
This time last year, CEO and fund manager Robin Geffen started increasing his exposure to emerging markets across his global funds for the first time since 2013.
“People had completely written off emerging markets but that’s when I think things became interesting,” he said. “Valuations were low and remain so, but China was beginning to stabilise under more effective policy measures. The stabilisation of the Chinese economy was the bedrock of a complete turnaround in the opportunity set.”
“So far the move into emerging markets has been positive, but we think there is plenty of room for upside from here in a number of different areas. What has been especially pleasing has been the stellar performance of our emerging market range over this period. The Neptune Emerging Markets, Neptune India, Neptune Latin America and Neptune Russia & Greater Russia funds are all well ahead of their benchmarks over the past year, and over three years as well.”
Having languished under a deflationary environment, slower global growth and weak PMIs from their key importers, emerging markets rebounded last year as these trends began to reverse. Now we are seeing the effect of these headwinds turning into tailwinds. Emerging market equities have just had their strongest first quarter since 2012, PMIs have been increasingly strong and growth prospects are improving. Over the past 12 months, the MSCI Emerging Markets Index has returned 44.2%, compared to 30.4% from the MSCI World Index.
Ewan Thompson, manager of the top performing Neptune Emerging Markets Fund, rotated his portfolio’s bias significantly in the wake of a changing economic climate last year.
“The conditions which suited a quality-biased fund are now changing rapidly, which just goes to show how flexible you need to be when it comes to emerging markets. Having been firmly focused on defensive, domestic-driven stocks up until 2015, we rotated towards value last year. To us the backdrop is ideal for cyclicals; stabilising and increasing global growth, a Chinese ‘hard-landing’ off the table and commodity price rises driving inflation.”
The Neptune Emerging Market Fund sits in the top decile of the IA Global Emerging Markets sector over one and three year periods, having returned 50.7% and 54.3% respectively. It is also comfortably ahead of the MSCI Emerging Market benchmark over this period.
The valuation springboard:
More broadly, despite the fact that earnings growth in emerging markets is forecast for 17-18% over the next year, Ewan notes that valuations remain at around the same level they were at last year.
“With earnings upgrades coming through, we expect to see a rerating in equity markets. Emerging markets are still trading at a significant discount of around 30% to developed markets and to us this makes them look very good value indeed. The scale of the opportunity should not be underestimated by investors. Given the depth that valuations sunk to thanks to such a protracted period of underperformance, there is plenty of spring in the market. In our view, there is still plenty of upside from here.”
An inflection point in earnings?
Emerging market businesses were awkwardly positioned for a slowdown in global growth in 2010; they had binged on capacity expansion and were suddenly faced with an excess capacity hangover. Now, thanks to a broad capacity cutting program – particularly in the commodities sector – prices are stabilising. Chinese initiatives to steer the economy away from a ‘hard-landing’ by supporting the housing market have also increased demand for raw materials, iron ore in particular. This increase in stability, combined with strong earnings growth data, leaves emerging market stockpickers with an interesting opportunity set.
Neptune India Fund manager Kunal Desai has been capitalising on this dynamic in India.
“We have seen big moves across the emerging markets but the key to these returns becoming sustainable is the earnings recovery story, something we’ve been talking about in India in particular for a long time,” he said. “We are at an inflection point, where you are seeing demand picking up, using up this excess capacity, whilst companies are continuing to show balance sheet restraint. That’s the real cash flow sweet spot.”
The Indian stockmarket, led by Narendra Modi’s reform agenda, has performed extremely well in recent years. The Neptune India Fund has managed to significantly outperform with a lower volatility, returning 88.3% over a three year period. Kunal believes certain parts of the market, particularly a number of large caps, are now fully valued, but sees plenty of room for upside in domestically focused mid-cap stocks.
Learning from the past
While the revival of emerging markets is certainly good news for active investors, this is not merely a valuation anomaly play. Five long years of low growth have forced these economies to employ longer-term strategic initiatives to improve their business climates.
“You are seeing better corporate governance, the reducing of current account deficits and government reform programs across the board,” said Ewan. “The key overweights in the emerging market funds are in the economies that are pursuing pro-reform agendas, from Modi’s modernisation of India to Russia’s commitment to becoming a top 20 World Bank “Doing Business” economy by 2020.”
The Neptune Russia & Greater Russia Fund continues to benefit from its significant exposure to ‘New Russia’, in contrast to the energy and materials biases of the benchmark. This has contributed to the Fund’s significant outperformance versus the MSCI Russia Large Cap Index over a one and three year period.
While the Fund is less exposed to oil than the wider benchmark, the stabilisation of the oil price since the lows of early 2016 has been a big driver of the market over the past year. The current oil price is at something of a Goldilocks level for Russia. The rally through 2016 has reduced the stress on the budget, and the stronger ruble has helped anchor inflation, which should allow the Central Bank to continue to lower rates. We believe there is much more room for rates to come down in Russia than consensus, which in turn will boost economic growth above expectations. However, the government is very aware of the need to diversify the economy away from natural resources, and the oil price shock will help to drive reforms, which will again stimulate stronger economic growth in the medium term.
As always, challenges remain:
While the long-term growth prospects for emerging markets are attractive, the nature of the asset class means that investors always need to be wary of downside risks. Corporate governance and political reform have been a bright spot in emerging markets of late, but one area with less positive newsflow in recent days has been Brazil.
Thomas Smith, manager of the Neptune Latin America Fund, acknowledges that a potential lawsuit against President Michel Temer is a setback, but says it is too early to tell what impact it will have beyond the immediate short term, and remains open to potential buying opportunities.
“The move in the market after the news broke suggests investors are pricing in zero chance of further reforms. While these allegations are likely to delay the reform agenda, it remains a key priority for Temer, and we believe this will be the case for the new government should Temer leave,” said Thomas.
“Political reform is widespread across Brazil and Argentina and both are better placed to withstand short term political turmoil than they have been in recent years – the fundamentals in Brazil are considerably stronger than during the 2015/16 sell-off. Inflation has been falling fast and consistently, external accounts are in great shape (12-month rolling trade surplus is the largest on record), the global scenario is more supportive, companies are less leveraged, the banking system is solid, and economic activity is no longer in free fall.”
“Finally, the Ministry of Finance and the Central Bank are led by very capable, seasoned technocrats that have a strong sense of public responsibility and are not likely to immediately leave the government if Temer falls. The growth prospects for Latin America are very encouraging, but as with any emerging economy you have to be cognisant of the potential for short-term blips, that is why we focus on downside protection by maintaining a diversified portfolio.”
Like all of the funds in Neptune’s emerging market range, the Neptune Latin America Fund has a significant focus on downside protection. The Fund protected Latin America investors from the worst of a difficult period between 2013 and early 2016, and yet has participated fully on the upside more recently. It is among the best performing Latin American focused funds in the IA Specialist sector over one, three and five years, and is ahead of the MSCI EM Latin America Index over all of these periods.
Geffen finished: “We have a fantastic team of emerging market specialists at Neptune, and I’m confident they can continue to deliver strong outperformance to our clients. Emerging markets have had a really difficult time over the past five years or so, but the tide is turning in their favour once again. Not for a number of years have we seen an improving growth story happening simultaneously in the emerging and developed worlds. It’s a great backdrop for an asset class that is attractively valued.” |
The World’s Biggest Bargain Is In Emerging Markets by Nicholas Vardy:
Why Invest in Emerging Europe
There are three reasons to invest in Emerging Europe.
First, markets are cheap.
Emerging Europe as a whole trades at a CAPE ratio of 8.3. That’s over a 40% discount to emerging markets as a whole. Or the emerging Europe CAPE ratio trades at a 73% discount to the S&P 500.
An incredible five out of the top seven cheapest markets in the world, as measured by CAPE, are in emerging Europe (Russia, Czech, Turkey, Poland and Hungary).
Drilling down even further, tiny Hungary boasts three of the top six cheapest stocks on the planet through the lens of CAPE.
Second, investors hate emerging Europe. The thought of investing your hard-earned money in Russia or Turkey is unlikely to make you feel warm and fuzzy. From an investment standpoint, that’s a good thing.
Third, the region’s stock markets are in an uptrend.
What is to Be Done?
The lesson is clear.
Stock markets have their seasons. The U.S. stock market has been “in season” for the past decade.
In contrast, global stock markets have been a terrible place to invest.
I believe the seasons are now changing. |
................Fund Bench Mark Deviation
Taiwan..........18.1% 12.3% 5.8%
China...........16.0% 27.0% -11.0%
South Africa....11.7% 6.6% 5.1%
Russia...........7.5% 3.8% 3.7%
Brazil...........7.2% 7.6% -0.4%
Thailand.........6.0% 2.3% 3.7%
Mexico...........5.9% 3.7% 2.2%
South Korea......5.6% 15.1% -9.5%
Turkey...........4.1% 1.0% 3.1%
Czech Republic...3.1% 0.2% 2.9%
Chile............2.8% 1.2% 1.6%
Indonesia........1.6% 2.5% -0.9%
Hungary..........1.6% 0.3% 1.3%
UAE..............1.4% 0.7% 0.7%
India............1.0% 8.9% -7.9%
Malaysia.........1.0% 2.4% -1.4%
Saudi Arabia.....0.7% 0.0% 0.7%
Poland...........0.0% 1.2% -1.2%
Philippines......0.0% 1.2% -1.2%
Qatar............0.0% 0.8% -0.8%
Colombia.........0.0% 0.4% -0.4%
Peru.............0.0% 0.4% -0.4%
Greece...........0.0% 0.3% -0.3%
Egypt............0.0% 0.1% -0.1%
Cash.............4.7%
Dividend total for the year 4.9p payable February, June, August and November
Discount to Nav 2.76% |
Emerging markets have returned to form - time to buy?
After five difficult years, emerging markets have returned to form over the past 12 months. Over the past five years there were some $80 billion (£63 billion) of outflows from emerging market equities, and the average global investor went underweight in the sector, says Bernard Moody, co-chief investment officer at Aberdeen. Last year this trend reversed, and the asset class saw some $7-8 billion of inflows as currencies stabilised.
Political factors have been influential in emerging market countries: the continuing fiscal and economic reforms of India’s prime minister, Narendra Modi, who is widely seen as pro-business, for example. Favourable developments have included China’s ostensible avoidance of a ‘hard’ economic landing and the impeachment in 2016 of Dilma Rousseff, then president of Brazil, which sent the Brazilian market soaring. Commodity prices have also rebounded.
Compared with 12 months ago, emerging markets look a lot more attractive, says David Stubbs, global market strategist at JPMorgan. In 2015 commodity prices and emerging market currencies were falling, but the sector started to turn a corner in early 2016. Reassuringly, he points out that two-thirds of the MCSI Emerging Markets index now consists of consumer, finance and technology businesses, which are all promising sectors for future development.
Stubbs says: ‘Given the growth story, investors should consider emerging markets for the long term. The upside for emerging market currencies is now much higher than the downside.’ The current accounts of the ‘fragile five’ (Turkey, Brazil, India, South Africa and Indonesia) – so named because of their large current account deficits, which mean they rely on external investments flowing across their borders – have improved.
Omar Negyal, co-manager of JPMorgan Global Emerging Markets Income Trust, says: ‘The recovery currently underway in a number of emerging economies and the stability we foresee in China this year support expectations of a broad-based turnaround in emerging market fundamentals in the medium term.’
His sentiment is echoed by Carlos Hardenberg, lead portfolio manager at Templeton Emerging Markets investment trust, who says: ‘After more than three years of languishing at depressed levels, the earnings of emerging market firms are showing signs of recovery, and that is reflected in the attitudes of companies and their managements as well as firms’ financial data.’
Recounting a recent trip to Dubai where his team met a range of companies from Africa, the Middle East and other emerging markets, Hardenberg says: ‘[They] were far more confident and open in sharing their outlook for the next 12 to 24 months.’
He argues that after a relatively bleak period for emerging markets, it seems many factors that have historically attracted investors to these markets – including stronger earnings growth than developed markets, higher GDP growth and more attractive consumer trends – may be coming back into play.
Evolving story
Emerging markets are evolving and not just emerging, according to Hardenberg. The kinds of emerging market companies he currently invest in are a world away from the firms his team analysed a decade or two ago. Technology and digital businesses have established themselves much more firmly in the region.
He says: ‘The emerging market corporate landscape in general has undergone a significant transformation from the often plain vanilla business models of the past, which tended to focus on infrastructure, telecommunications, classic banking models and commodity-related businesses, into a new generation of highly innovative companies that are moving into technology and much higher value-added production processes.’ He adds that some very strong global brands have originated in emerging market countries.
Back in the late 1990s technology-oriented companies made up just around 3 per cent of the corporate universe represented by the MCSI Emerging Markets index. Hardenberg says: ‘Even six years ago, information technology firms represented less than 10 per cent of investable companies in the index.’
Much has changed since then. Today around a quarter of companies in the MSCI Emerging Markets index are IT companies, including hardware, software and component suppliers.
While much of this activity is originating in Asia – including Taiwan, South Korea and increasingly China – similar development can be seen in Latin America, Central and Eastern Europe and even Africa.
Hardenberg says the IT sector can be difficult to understand and value. Business models are rapidly changing as they adapt to the shifting demands of consumers and respond to new environmental regulations. Currently, he has identified opportunities among some larger companies, but he generally tends to favour medium-sized companies with potential to outgrow the market as a whole.
Companies in emerging markets have evolved rapidly, but Hardenberg is adamant that the emerging markets asset class remains one in which active management continues to play an important role. He says: ‘Emerging markets tend to have their own business rules and regulations which affect companies. Firms differ greatly in their attitude towards minority investors, governance standards vary significantly, and local intricacies determine consumer trends and habits. We often need to develop fairly close relationships to gain a better understanding of business prospects and find successful management teams that respect the rules.’
Risk worth taking
Global emerging market equities remain subject to external risk, says Moody. US president Donald Trump has talked about taking jobs back to the US – although markets have shaken that off, given that his election campaign promises are proving difficult to deliver.
Traditionally, a strong dollar has also been bad for emerging markets, says Stubbs, ‘but it is now less of a red flag’. He adds that the dollar is strong, but emerging market equities have done fine anyway.
Negyal is more cautious. He believes that ‘dollar strength and the direction of US trade and foreign policy under Trump’s administration remain the most important risks’.
Trump’s policies pose more of a risk to some emerging market countries than others. Stubbs says exports to the US represent a low proportion of Brazilian and Indian GDP, for example, but Mexico is vulnerable if Trump’s proposed border controls come into play.
US rate rises are another potential hazard. However, Moody believes they are likely to arrive slowly and remain modest, and they will only happen at all against a backdrop of a robust US economy.
Moody adds: ‘Of course, there will always be political risks. North Korea is sending missiles in the direction of Japan; China’s party plenum is coming up later this year.’ But there are always risks, and those who invest in emerging market equities are paid a premium for taking those risks.
Could Brexit derail emerging markets? It’s unlikely, according to Moody. The eurozone and the UK are important parts of the global economy, but their significance to emerging markets is not huge. ‘Are we going to buy fewer electronic gadgets from Korea and Taiwan because of Brexit? Probably not.’
JPM global Emerging Markets Income:
This trust, managed by Omer Negyal, is underweight in Korea and China, and overweight in Taiwan and South Africa. It returned 6.1 per cent over the three months to 10 April, compared with a sector average of 6 per cent. Over one year it returned 43.8 per cent, compared with a sector average of 32 per cent. Over three years it returned 26.6 per cent, compared with a sector average of 24.4 per cent.
The MSCI Emerging Markets index is heavily dominated by China, which makes up 27 per cent of the index. But many active managers are underweight in China compared with the index.Negyal is one.
He says: ‘We typically don’t like investing in companies with state involvement, so we have no exposure to the large banks, for example. The other large part of the market to which we have no exposure consists of internet names such as Tencent, Alibaba and Baidu. These are good companies, but they pay little or no dividend (Tencent yields just 0.2 per cent).’
His fund is also underweight in South Korea, because of domestic companies’ governance issues. He says: ‘Korean businesses are typically family run and complicated, which often means shareholders and dividends are not on their priority lists. Korea is renowned for having one of the lowest payout ratios of any market globally.’ As always, the fund’s country and sector positions are the result of individual stock decisions.
He adds that his fund’s long-term approach led him to invest into weakness in Brazil, Russia and South Africa in 2015, ‘and has also led us to increase our Mexican exposure during 2016. The Mexican peso weakened throughout the year, allowing us to build positions in quality companies (Walmart de Mexico and Fibra Uno) we believe offer strong income and growth potential.’
However, following the sharp decline of the market and currency after the US election result, the headwinds faced by quality businesses hurt the fund’s performance.
He says: ‘Another laggard market, Turkey, has also provided attractively valued opportunities, so we have increased our overweight there a little, with oil refiner Tupras a recent addition.’
From a sector perspective, he favours telecoms and consumer companies, while he is less keen on industrials and energy. |
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