Emerging market equities discount is not justified
Aberdeen Asset ManagementÆs Mark Gordon-James says many companies in emerging markets are expected to deliver better earnings growth than their Western peers over the long-term.
Mark Gordon-James is an investment manager on the global emerging markets equities team of Aberdeen Asset Management, which manages around $10 billion in global emerging market equities. He joined Aberdeen in 2004 from Merrill Lynch Investment Managers where he also worked with the emerging markets team. He shares with AsianInvestor his views about emerging market equities at a time when investors are still extremely conscious of risk.
What is your weighting for emerging market equities within a global equities portfolio?
Gordon-James: My colleagues in the global equity team continue to be overweight global emerging markets (18.6%). They have been significantly underweight the US equity market (18% versus a 50% benchmark weighting) for a long time as they have found better opportunities in emerging markets.
How has your weighting for emerging market equities changed compared to one year ago?
In terms of the our global equity portfolios, there has not been a significant change to the portfolio weightings
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
In terms of the Aberdeen Global-Emerging Markets Equity Fund, no, we have not made any major changes. The fund has approx 55 stocks and portfolio is turnover is very low; in fact this year we have introduced just two stocks, and sold two (as of December). The key variable for us is whether we remain comfortable with each and every company in the fund; we must have high conviction in the long term robustness of each and every business we own.
Flight to safety and flight to quality have been the prevailing investment strategies of many investors over the past few months. How will this affect emerging market equities, considering that emerging markets have generally been considered riskier than developed markets?
IÆm afraid this has already happened. The flight to quality and safety became a torrent in September and October, reflected in unusually steep declines in all emerging market assets and currencies. But notwithstanding the current slowdown weÆre experiencing, the longer term outlook continues to be one of opportunity for quality businesses in the emerging world, and valuations are additionally attractive. ItÆs been some time since weÆve seen clear value opportunities in emerging markets, but it is certainly the case today. So I expect stabilisation and reflection will result in inflows again.
What is your outlook for emerging market equities in the coming 12 months?
While the slowdown in global growth will certainly hurt, inflation is less of an issue now and expansionary fiscal and monetary policy should help. Banks in emerging markets are much stronger than their western counterparts, which is of vital support. So we expect that domestic demand should increasingly counter weaker overseas demand. For that reason we remain quite sanguine, especially as valuations are attractive at this point in time.
Do you expect emerging market equities to outperform or underperform other markets in 2009?
Emerging markets trade at a considerable discount to developed markets, as does our portfolio of high quality companies. I donÆt really see justification for this, given these companies should deliver better earnings growth than their western peers over the long term. So following a miserable 2008, the year of the Ox should be relatively rewarding for emerging market investors, we hope.
What are the opportunities available in emerging market equities at the moment?
We are finding high quality opportunities at very attractive valuations across several markets, but they are very stock specific. Akbank, the leading private bank in Turkey, for instance, and Lojas Renner, the leading mid-market fashion retailer in Brazil, are two we have found. At Aberdeen we donÆt chase value for the sake of it û quality of the business is priority. So we continue to avoid value opportunities where quality is circumspect, such as Russia generally.
Which particular emerging markets do you favour?
India û with its attractive financial, IT, pharmaceutical and consumer sectors, Indian companies û stand out in terms of quality. Earnings multiples remain at the high end of regional benchmarks, but earnings potential remains among Asia's strongest and risk of disappointment somewhat lower as well.
Mexico offers both well-run companies and relative value, particularly among the mid-cap stocks.
Turkey trades at low multiples because the country is seen as risky, but there are some excellent businesses in Turkey that have proven their ability to manage volatility profitably over the long-term.
Which emerging markets will you be avoiding in the coming months?
China. The country remains one of the most exciting growth stories in Asia but the positive macro environment is not always reflected at the corporate level. In many cases we are not convinced by the quality of management, plus accounting standards and transparency can be poor.
Russia. Companies continue to grapple with poor corporate governance, unclear shareholding structures and poor business practices, while the regulatory and legislative environment can be unpredictable to say the least. Now there is also the risk that a weak banking system further limits private sector opportunities.
Within emerging markets, which sectors are you bullish over?
Financials. We see financials as domestic consumption plays through which we can capitalise on the rise of the middle class in emerging markets, particularly given the low penetration of financial products.
Consumer staples and discretionary. We continue to like consumer-focused companies. This is based on our optimism about the potential for domestic demand growth in emerging markets, given their young, growing populations, and our conviction in the quality of our consumer holdings.
Which sectors are you bearish about?
Telecom services. We are underweight the sector because of concerns over the long-term sustainable competitive advantage of fixed-line operators.
Materials. We remain wary of the sector, where businesses tend to be cyclical and do not fit in with our long term, steady growth investment style.
Industrials. We generally view companies in this sector as cyclical businesses that regularly suffer from periods of poor profitability, and are thus underweight.
What are the biggest challenges in finding suitable investments in emerging market equities under the current market conditions?
Understanding, in detail, our holdings is paramount in this environment, but otherwise current market conditions present many opportunities to buy quality companies at very attractive valuations.
The December/January edition of AsianInvestor magazine contains a feature on emerging market equities.
What is your weighting for emerging market equities within a global equities portfolio?
Gordon-James: My colleagues in the global equity team continue to be overweight global emerging markets (18.6%). They have been significantly underweight the US equity market (18% versus a 50% benchmark weighting) for a long time as they have found better opportunities in emerging markets.
How has your weighting for emerging market equities changed compared to one year ago?
In terms of the our global equity portfolios, there has not been a significant change to the portfolio weightings
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
In terms of the Aberdeen Global-Emerging Markets Equity Fund, no, we have not made any major changes. The fund has approx 55 stocks and portfolio is turnover is very low; in fact this year we have introduced just two stocks, and sold two (as of December). The key variable for us is whether we remain comfortable with each and every company in the fund; we must have high conviction in the long term robustness of each and every business we own.
Flight to safety and flight to quality have been the prevailing investment strategies of many investors over the past few months. How will this affect emerging market equities, considering that emerging markets have generally been considered riskier than developed markets?
IÆm afraid this has already happened. The flight to quality and safety became a torrent in September and October, reflected in unusually steep declines in all emerging market assets and currencies. But notwithstanding the current slowdown weÆre experiencing, the longer term outlook continues to be one of opportunity for quality businesses in the emerging world, and valuations are additionally attractive. ItÆs been some time since weÆve seen clear value opportunities in emerging markets, but it is certainly the case today. So I expect stabilisation and reflection will result in inflows again.
What is your outlook for emerging market equities in the coming 12 months?
While the slowdown in global growth will certainly hurt, inflation is less of an issue now and expansionary fiscal and monetary policy should help. Banks in emerging markets are much stronger than their western counterparts, which is of vital support. So we expect that domestic demand should increasingly counter weaker overseas demand. For that reason we remain quite sanguine, especially as valuations are attractive at this point in time.
Do you expect emerging market equities to outperform or underperform other markets in 2009?
Emerging markets trade at a considerable discount to developed markets, as does our portfolio of high quality companies. I donÆt really see justification for this, given these companies should deliver better earnings growth than their western peers over the long term. So following a miserable 2008, the year of the Ox should be relatively rewarding for emerging market investors, we hope.
What are the opportunities available in emerging market equities at the moment?
We are finding high quality opportunities at very attractive valuations across several markets, but they are very stock specific. Akbank, the leading private bank in Turkey, for instance, and Lojas Renner, the leading mid-market fashion retailer in Brazil, are two we have found. At Aberdeen we donÆt chase value for the sake of it û quality of the business is priority. So we continue to avoid value opportunities where quality is circumspect, such as Russia generally.
Which particular emerging markets do you favour?
India û with its attractive financial, IT, pharmaceutical and consumer sectors, Indian companies û stand out in terms of quality. Earnings multiples remain at the high end of regional benchmarks, but earnings potential remains among Asia's strongest and risk of disappointment somewhat lower as well.
Mexico offers both well-run companies and relative value, particularly among the mid-cap stocks.
Turkey trades at low multiples because the country is seen as risky, but there are some excellent businesses in Turkey that have proven their ability to manage volatility profitably over the long-term.
Which emerging markets will you be avoiding in the coming months?
China. The country remains one of the most exciting growth stories in Asia but the positive macro environment is not always reflected at the corporate level. In many cases we are not convinced by the quality of management, plus accounting standards and transparency can be poor.
Russia. Companies continue to grapple with poor corporate governance, unclear shareholding structures and poor business practices, while the regulatory and legislative environment can be unpredictable to say the least. Now there is also the risk that a weak banking system further limits private sector opportunities.
Within emerging markets, which sectors are you bullish over?
Financials. We see financials as domestic consumption plays through which we can capitalise on the rise of the middle class in emerging markets, particularly given the low penetration of financial products.
Consumer staples and discretionary. We continue to like consumer-focused companies. This is based on our optimism about the potential for domestic demand growth in emerging markets, given their young, growing populations, and our conviction in the quality of our consumer holdings.
Which sectors are you bearish about?
Telecom services. We are underweight the sector because of concerns over the long-term sustainable competitive advantage of fixed-line operators.
Materials. We remain wary of the sector, where businesses tend to be cyclical and do not fit in with our long term, steady growth investment style.
Industrials. We generally view companies in this sector as cyclical businesses that regularly suffer from periods of poor profitability, and are thus underweight.
What are the biggest challenges in finding suitable investments in emerging market equities under the current market conditions?
Understanding, in detail, our holdings is paramount in this environment, but otherwise current market conditions present many opportunities to buy quality companies at very attractive valuations.
The December/January edition of AsianInvestor magazine contains a feature on emerging market equities.
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