In the second-part of his look at what will shape EM equity in 2018, Rob Griffin hears how a top-performing pair are positioning to find powerful players at a domestic level.
Mike Jennings, a TT investment strategist, said two thirds of the fund’s outperformance can be attributed to stock selection, with the rest coming from countries, sectors and currencies.
‘Over five years there have been strong relative returns from a number of countries and in each of the Asian, EMEA, and Latin American regions,’ he says.
The most significant country returns have been generated in Mexico, Russia, South Africa and South Korea over this period, while contributions at a stock level have also been wide-ranging.
‘China Galaxy Securities, a Chinese stockbroker, has delivered the greatest return, followed by Argentinian utility Pampa Energia, and Korean favourite Samsung Electronics,’ he says.
Being able to successfully combine top-down and bottom-up factors is the secret to success in this area, says Jennings. ‘There have been many political and reform-driven changes over recent years that have impacted – both positively and negatively – the returns from emerging markets.’
For example, the respective elections of Mauricio Macri in Argentina and Narendra Modi in India have been clear catalysts for these markets to outperform. At a stock level, he says the mid-cap area of emerging markets provides access to previously undiscovered, well-run growth opportunities.
‘These are often very domestically focused so they can provide attractive and undervalued exposure to strong local themes and trends,’ he says.
While emerging markets suffered persistent underperformance and outflows from 2010-2015, Jennings says these trends have started to reverse since the start of 2016.
He believes further tailwinds are likely. ‘Global trade growth has accelerated sharply over the past year, which directly benefits emerging economies.’
Jennings also says that emerging market growth expectations have been accelerating. ‘While this favours emerging market equities, they have not benefited from the substantial re-rating that developed markets have seen in recent years,’ he says.
Jennings adds that, relative to the US equity market, emerging counterparts’ trade on a 27% discount on a simple price-earnings metric – a gap which he expects to narrow. ‘Structurally we expect emerging markets to take a growing share of global equity indices in the years ahead, as befits their increasing importance in the world economy.’
These comments originally appeared in a supplement which was published with the December 2017 edition of Citywire Selector magazine.