Fat lady’s sung on investment good times

CAPE TOWN – One of themes facing global investors at the moment is that, on the whole, it is difficult to find value. There is a general sense that equity markets are on the expensive side.

Some will therefore find it surprising that there isn’t more enthusiasm about emerging markets, where valuations seem much cheaper than in the developed world. The MSCI Emerging Markets Index is currently trading at a price-to-earnings (PE) multiple of under 13, while the MSCI World Index that focuses on developed markets is at a PE multiple of closer to 18.

However, speaking at the Glacier International Navigate Seminar on Monday BlackRock’s James Brown, pointed out that while there may be this discrepancy at market level, it’s difficult to find individual quality companies in emerging markets that are fairly priced.

“We’ve noticed a trend amongst investors limited to emerging markets that many almost hide in the very few high quality businesses there are,” Brown explained. “So when we look as an investor, we see high quality businesses that we could own, but we are being asked to pay some quite high valuations. We can actually get high quality businesses in developed markets at more reasonable valuations.”

It certainly appears to be the case that investors have become far more selective about the stocks that they buy in emerging markets, and it is no longer a case of inflows lifting markets as a whole. As Mike Soekoe of Foord Asset Management noted, the interest in emerging markets is not as high as it was just a few years ago.

Soekoe pointed out that emerging markets became a major theme after the dotcom bubble in 2001 when the Federal Reserve began to cut interest rates to stimulate the US economy. That led to a search for yield.

Something similar happened after the financial crisis in 2008, when again interest rates were slashed and the demand for yield led investors out of developed markets. For a few years this was also at a time when China’s demand for commodities was at its height and so emerging markets looked very attractive.

“However, we think that time is over,” Soekoe said. “China is slowing, and demand for commodities is slowing. The US is also trying to normalise interest rates. So we don’t think that emerging markets are that enticing for global investors anymore.”

Many global investors are therefore preferring to get their emerging market exposure through multinational companies listed in the developed world, but who earn a good portion of their revenues in places like Africa, Asia, Latin America and the Middle East.

“For us it’s important to focus on the individual company as opposed to where it’s domiciled,” said Kevin Johnson of Dodge & Cox. “We own a number of multinationals that have a significant presence in Africa, for example.”

Johnson added that it’s also become important not to see emerging markets as a homogenous group, as there are very different realities in different countries.

“What is happening in Brazil is very different to what’s happening in India, or Russia, or China,” he said. “You can’t lump all emerging markets together.”

In this respect, Foord Asset Management may not be bullish about emerging markets in general, but it is enthusiastic about China.

“It hasn’t been the place to be lately, but we still like the theme if we take a long term view,” Soekoe said. “Our allocation to China is taking a multi-decade view and we are excited about it because of its huge population, its rising per capita income and the country’s continued economic growth.”

Although growth in the country is slowing, he does not expect a hard landing there. In particular, growing incomes makes the consumer market very attractive and Foord is playing it by investing in Chinese insurance companies listed in Hong Kong.

“As people are getting wealthier, they want to save for the future and secure their families’ futures,” Soekoe said. “So we think there is huge potential for life insurance companies like AIA. The short term insurance market is also very immature there and as people get wealthier they want health insurance, crop insurance and all kinds of insurance that they don’t have at the moment.”

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