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    Emerging Markets – Why We Like Them And How We Own Them

    Eight and a half years of rising markets combined with the $15trillion (and counting!) splurge by Global Central Banks hasn’t left many assets looking cheap. We believe that Emerging Market (EM) equities, whilst not kicking around in the bargain basement, are by no means expensive. To us, along with Asian equities more generally, they rank amongst the best regional opportunities for value on a global basis.

    Although EM stocks are having an excellent 2017 (up nearly 20% year-to-date), they still lag behind their developed counterparts over recent time periods.  Over the last three years, EM’s lag global stocks by nearly 60% and are under-owned by global managers. Recent data from EPRF Global suggests that the average global manager has an allocation of some 8% towards EM stocks versus an all country benchmark weighting of circa 12%.

    Emerging Market stocks are currently attractive, not least because of their valuations. At a forward P/E multiple of circa 12.6x, they are trading at a marked discount to their developed market counterparts which trade on a more full 16x multiple of next years’ earnings. In addition to this, EMs are enjoying extremely strong earnings growth (expected to run at 20% this year) combined with the virtuous kicker of rising profit margins. This earnings growth is especially pronounced within the Asia region which is our preferred area. Value alone is not enough for us, but combine it with improving business cycles along with the fact it’s under-owned and it gets our contrarian juices flowing. 

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    “The bargain basement may be bare, but there’s plenty discount still on offer amongst Asian markets to whet our appetites.”​

    Asia constitutes roughly 70% of the EM benchmark, with BlackRock Asian Growth Leaders and Macqaurie’s Asian All Stars fund our preferred means of access. We like Asia since this is where we see the highest rates of growth. Not only is growth high, but it’s surprising to the upside, policy is being eased and inflation rates are (generally) falling. Additionally, Asian EMs are net commodity importers and hence can benefit from the bottoming we believe we’re seeing in commodity prices.

    Perhaps counterintuitively for an index with nigh on 850 stocks, the MSCI Emerging Market Index is fairly narrowly concentrated. The top five stocks make for nearly 20% of the index, and the top five technology stocks account for nearly 16% of the index. This means that by owning EMs passively, you’re 1) taking a fairly concentrated position and 2) buying into the more expensive end of the index. Owning these stocks has clearly been the way forward this year, with the IT sector up almost 50% in USD terms and the big five tech names up 60% on average but it comes with risk that needs to be appreciated.

    Our preference is not to invest passively as we feel this skews us towards IT stocks (a whopping 27% of the index these days!) and state-owned banks; both at opposite ends of the valuation spectrum and both with risk. We’d rather an active manager sift through some of the more weighty names and then gain exposure to the underlying growth of the Asian middle class which we expect to reap our clients’ rewards for many years to come. The bargain basement may be bare, but there’s plenty discount still on offer amongst Asian markets to whet our appetites.

    Rory McPherson

    Head of Investment Strategy​


    Important Information

    ©2017 Psigma Investment Management. This article is prepared for general circulation and is intended to provide information only. It is not intended to be construed as a solicitation for the sale of any particular investment nor as investment advice and does not have regard to the specific investment objectives, financial situation, capacity for loss, and particular needs of any person to whom it is presented. 

    The investments contained in this document may not be suitable for all investors. Prospective investors should consider carefully whether any of the investments contained in this publication are suitable for them in light of their circumstances and financial resources. If you are in any doubt whether any of the investments contained in this publication are suitable, you should speak to your Investment Director, or take appropriate advice from an accountant, lawyer or independent financial adviser authorised and regulated by the Financial Conduct Authority. The value of investments and the income from them can fall as well as rise. 

    An investor may not get back the amount of money that he/she invests. Past performance is not a guide to future performance. Foreign currency denominated investments are subject to fluctuations in exchange rates that could have a positive or adverse effect on the value of, and income from, the investment. Investors should consult their professional advisers on the possible tax and other consequences of their holding any of the investments contained in this publication. This publication has been approved and issued by Psigma Investment Management Limited. Psigma Investment Management Limited is authorised and regulated by the Financial Conduct Authority with FCA firm reference number 478840.

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