Emerging markets (EM) are being overlooked by share investors despite offering stable market conditions and reasonable valuations from unloved companies that are providing good performance, according to an Asia-based asset manager.
Eastspring Investments portfolio manager Navin Hingorani said EM outperformance usually take place when the United States dollar is falling, which expands the growth differential with developed markets.
“The starting point for emerging markets in terms of valuations and positioning is really compelling. Emerging markets are currently cheap, trading at a 65 per cent discount to the US, and investor positioning towards the emerging market is almost in a trough,” Hingorani said.
“Since the 2000s, 10 of the 11 biggest rallies in emerging market stocks have been during periods of a weakening US dollar. This year, the US dollar has been on a downward trajectory.
“Likewise, emerging markets have outperformed developed markets in environments where the growth differential between the two is expanding, which is the environment we are in right now.
“We are seeing stable to increasing growth in emerging markets versus declining real gross domestic product growth in developed markets,” he said, adding capital expenditure increases were another indicator of a rebound.
“Since the financial crisis, capital expenditure had been declining, but this is starting to change. Emerging markets are the manufacturers and suppliers to the rest of the world and tend to perform very strongly when capital expenditure is increasing, which is the shift we are seeing happen right now.
“When you take all three factors into account, it suggests an environment where you have faster earnings per share growth in emerging markets.”
He said active management would be important in choosing stocks to invest in, especially with the introduction of US tariffs on some sectors of the EM, and would help identify stocks that have been mispriced because of concerns around the impact of tariffs.
“Investors are essentially accessing a diverse range of economies across various continents. The universe of investable stocks is more than 3000, so active management plays an important role in bringing the essential thesis into specific economies and picking the right stocks with the limited resources that you have,” he said.
“It is also essential to take out any bias when selecting stocks. Don’t just invest in the most popular and most loved stocks, instead identify stocks with compelling valuations and determine what the current share price may be telling you about future expectations.
“For investors, the biggest determinant of future return is the price that you pay when you go in and at the moment EMs are really compelling because they are trading cheap and the upside outweighs the uncertainties.”