International Shares, Investments

Emerging markets offer good value

emerging markets ESG

Emerging markets are undervalued and will be a source of good returns as ESG factors become more common.

A portfolio manager has encouraged investors to be optimistic about share market growth as many of the risk factors in the market have been addressed, creating opportunities for stock pickers, particularly in emerging markets.

Martin Currie global emerging markets portfolio manager Alastair Reynolds pointed out the market had already come to terms with rising interest rates, heightened inflation and resurgent COVID-19 infection rates.

“The good news for bottom-up investors is that these factors appear to have been priced in already. The challenge to us is to identify those companies which are positioned to lead the pack in the year ahead; investing in quality and growth will pay off in the long run and 2022 is no different,” Reynolds said.

“We believe that there are still plenty of reasons to be optimistic about strong growth this year, such as rising technology demand, recovering domestic consumption and a worldwide investment wave in green energy solutions.”

According to Reynolds this optimism extends to emerging markets, which were being undervalued currently compared to developed markets.

“The valuation gap relative to developed markets is sizeable; at an index level, emerging markets are at near all-time lows from both a price-to-book and price-to-earnings measure,” he said.

“We expect this attractive relative valuation to close as the negative sentiment around emerging markets lessens and companies deliver on the expected earnings growth.”

He added the market mispriced sustainable growth and quality in emerging markets, meaning it overlooked returns gained from companies that engaged in environmental, social and governance (ESG) practices.

“We are exiting the period of emergency government/central bank actions to enter an environment where interest rates and government spending revert to a more sustainable level – this is a great environment for the best-quality companies to execute their strategies for growth. ESG directly manifests in quality governance and sustainability,” he explained.

“ESG matters in emerging markets because it directly translates into alpha [that is, excess return].

“Strong governance and sustainable practices around the environment and social capital help to generate sustainable long-term returns. This is clearly visible in the outperformance of the region’s ESG leaders compared to the broader market over the last decade.

“Given the macro environment, we expect ESG credentials to be a strong determinant of company performance in the year ahead.”


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