Global equity markets offer investors different prospects via growth or value strategies depending on the region, but the best of both worlds can be found in emerging markets, says Seth Masters, CIO at Alliance Capital in New York, who oversees how the money manager blends investment styles.
"From a value point of view, there are more opportunities outside of the United States," Masters says. But the firm's growth portfolios are overweight America.
Alliance Capital specializes in growth strategies while its unit Bernstein is a value specialist.
Value investors have had a good five years outside of the US, Masters says. "Value investors have done incredibly well and beaten growth by the biggest margin ever." That's in part due to the global bubble in TMT stocks, which made growth stocks overpriced. But in America, where the tech bubble excesses were greatest, the discounts for cheaper stocks are shrinking as these companies recover. So the value story has run much of its course in America compared to other markets.
On the other hand, he argues the US remains a strong growth story for equity managers. "Globally, growth and earnings have been spectacular over the past few years," he says. The impact of regional financial crises and the tech blow-up has led companies to become much more focused on internally creating cash flows. This means managements have been cautious even as profits have rolled in. In the past such inflows would have led to 'irrational exuberance' and investment sprees, but not this time. Companies instead have been reluctant to hire or invest, even though trends such as energy supply distortions are creating huge opportunities. Big American companies have benefited from this scenario the most and so their earnings remain buoyant.
But whether you prefer value or growth strategies, Masters argues that emerging markets are the one place that offer investors success in both.
Those companies from emerging markets that have survived the past decade's worth of turmoil are now benefiting from global economic trends. Masters points to growth stories in emerging markets such as wireless technology outpacing fixed-line telecom companies. But many emerging-market companies are also cheap, often trading at discounts of up to 40% to peers in developed markets. "Markets like Indonesia are risky so you shouldn't pay the same for earnings growth there - but should you be paying 40% less, when growth is better than the US?"
As for Japan, a market much in favour by global equity managers today, Masters argues the good stories are global ones, not local. Before Japanese equities can perform better, he believes more reform is required, particularly a reversal of the Bank of Japan's policy of pumping liquidity into the market. "Before Japan raises interest rates, it has to drain the liquidity," he says.
It is encouraging to see a political appetite for reform in Japan, but Masters argues that investors aren't really buying the local market story.
"If you're buying Japanese companies, the outlook isn't about Japan," he says, citing Toyota as an example of a company whose fortunes are tied to the US market. Toyota's prospects of dominating the growing hybrid-fuel space in the American car market makes it attractive but it is only coincidental that it is based in Japan.