Russia is currently the single best value investment despite the incredible pressure the market has been under, according to Brandes’ EM specialist Louis Lau.
‘For some of the best opportunities in the value sector, I would single out Russia. It’s a market where the economy is broadly recovering from a recession and this year is the first where GDP growth will run positive,’ he told Citywire Selector.
Lau, who currently has around 11.5% allocated to the country in the Brandes Emerging Markets Value fund, said, despite the less-than-conducive macro environment, the team has been able to find high-quality companies.
‘Inflation has been on the decline and interest rates are also on their way down. We like some of the banks and the telecommunications companies. The real attraction is the headline risk, there’s been talk of additional sanctions by the US government against Russia.
‘This time it might focus on the ability of Russia as a country to raise sovereign debt. The country has been under sanctions for the past two years, those sanctions were primarily focused on conglomerate owners close to Putin and specific state owned companies.’
Lau said there has been headline risk of these sanctions being stepped up even more, which has contributed to some portfolio managers avoiding the country.
Bet on the broken
Elsewhere, Luis has 16.1% of the portfolio allocated to Brazil. He said the negative political sentiment and downward pressure on the currency is the main reason his team are finding value in the country.
‘Our holdings in Brazil are quite diverse, we have some not for profit education companies, food company exposure, banks, utilities and aerospace, so we are really across the board in Brazil. We also like Mexico as it is recovering very well since the initial shock of Trump and the Nafta negotiations.
‘In Mexico, we like the real estate investment trusts and we currently have three of those in the portfolio, as well as a cement company.’
With 8.4% of the fund allocated to the real estate sector, Luis said investors are missing the potential many real estate investment trusts have.
‘What the market doesn’t realise is that some of these facilities, especially industrial ones, are rented out to auto makers and makers of healthcare equipment in Mexico. A lot of these leases are in dollars, the stocks are listed on the Mexican stock exchange and trade in the peso, when the peso increases sentiment is very negative.
‘The underlying cash flows and revenues are in dollars, so it’s more of an FX arbitrage opportunity. Both the trust’s and the cement company benefit from demand recovery in the US and also certain parts or Europe, such as Spain, which have benefitted from this. So there’s been quite a lot of demand recovery in some of those markets.’
Over the three years to the end of June 2017, the Brandes Emerging Markets Value fund lost 5.9% in US dollar terms. This compares with a 4.39% rise by its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD, over the same time period.