Value hunters turn to emerging markets

20th August 2010

The main risk for the global equity markets is that there will be a double dip with the world plunging back into recession.

"The global economy is still in a fragile state," confirms Jonathan Armitage, co-manager of the Schroder Global Alpha Plus fund. "While it is increasingly difficult for consumers in most economies, emerging markets consumer demand remains strong."

Many companies are reporting increased profits as a result of cost cutting, but there is still a lot of uncertainty about the growth in demand in the developed economies. Armitage says this is in sharp contrast to the emerging markets where economic growth continues to be strong.

Solid as a BRIC?

Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, believes that following the global correction earlier in the year, many emerging equity markets now offer value.

"Most of the key emerging markets are trading at multiples below the five year average both on a price-earnings (P/E) basis and in terms of trailing price-to-book."

Dividend yields are more mixed but, again, mostly in line with the five year average. Poole says that Russia stands out as looking cheap on a valuation basis.

"At a 12 month P/E of around 5.8 compared to the five year average of 9, a 2011 forecast valuation of 5.2  and a trailing price-to-book of only 1.1, this market looks cheap even given the structural undervaluation that is typical of the market based on lingering transparency and other Russian-specific concerns."

The structural and cyclical macro story also remains strong in Brazil.

"Brazil is currently trading in line with the 5 year average P/E of around 9.5 and below 9 on a forecast basis, while the trailing price-to-book also suggests value."

China is trading on a multiple of 12.3, which is again cheap compared to the 5 year average, while India is in line on a P/E basis but still cheap in terms of trailing price-to-book.

Poole concludes that while the level of global uncertainty remains uncomfortably high, valuations now point to value in BRIC equity markets, with Russia standing out.

"On this basis, any correction on low volumes over the rest of the summer should be seen as an attractive entry point."

A second vote for Russia

Chris Palmer, head of global emerging markets at Gartmore, agrees that Russia offers the best prospects in the region.

"Our overweight position in Russia reflects our confidence in companies operating in the consumer-related industries."

Industrial production and retail sales have risen year-on-year, whilst unemployment has fallen.

Another plus point is the Russian car industry, which is in recovery mode after annual sales halved amid the global economic crisis in 2009. New car sales growth rose 9% year-on-year in the January to July period and soared 48% in July alone.

"President Medvedev has forecast GDP growth for the next three years and indicated that the growth may be higher if the government manages to execute all its economic development plans," he notes.

How best to invest in emerging markets?  

The most obvious option is to put your money into a global emerging markets fund. Palmer says that these benefit from having a more diversified portfolio of investments.

"This reduces the country, currency and political risk, which may result in a lower level of volatility."

The main alternative is to invest in one or more single country funds from the region.

"Single country funds benefit most from high conviction," he observes. They also give investors a greater chance to benefit from more small and mid cap exposure.  

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