Emerging Markets
Emerging Markets Are Great Value, Selloff Unjustified - Fund Manager
This year has seen a big divergence between performance of developed and emerging market stock markets, and a fund manager says the gap doesn't square with underlying economic reality.
Emerging market equities have been hammered by rising US interest
rates, a stronger dollar and fears that escalating US-China
tariffs will blunt growth, but valuations are reaching the level
where they are a screaming “buy”, a fund manager argues.
EM valuations have been approaching crisis levels due to
substantially weakened confidence (and performance), yet cash
flows and earnings generally remain resilient. These conditions,
when paired with improving corporate governance that includes
dividend pay-outs and buybacks, present an increasingly
attractive long-term buying opportunity for us,” Chetan Sehgal,
lead portfolio manager,
Templeton Emerging Markets Investment Trust, said.
“Many currencies have been cheap, and as value-oriented,
long-term investors, we continue to invest in companies that
demonstrate sustainable earnings power and trade at a discount
relative to their intrinsic value and other investments available
in the market,” Sehgal said in a note.
The MSCI Emerging Markets index of equities has fallen by 13.85
per cent since the start of this year. By comparison, the MSCI
World Index of developed countries’ index is down by 3.3 per cent
(both percentages are in dollars, and include the impact of
reinvested dividends).
“Longer-term buying opportunities for us are developing given
continued underlying fundamental strengths,” Sehgal
continued.
“We are witnessing the global supply chains and trading
relationships that have been integral to growing global
prosperity come under increasing pressure. Thus far, emerging
markets appear to have borne the brunt of the fallout: an
asymmetric - and, in our view, excessive - market reaction that
has contributed to valuations at near crisis levels by November
2018. However, these are valuations that to us represent
increasingly attractive buying opportunities, given where
fundamentals stand,” Sehgal said.
The OECD and other organisations see global economic growth
decelerating next year. The Paris-based body said that global
gross domestic product is likely to expand by 3.5 per cent in
2019, compared with the 3.7 per cent forecast in last May’s OECD
outlook, and by 3.5 per cent in 2020. The International Monetary
Fund sees emerging market economic growth in 2019 holding steady
at 4.7 per cent, while it has forecasted growth in advanced
economies to slow from 2.4 per cent in 2018 to 2.1 per cent in
2019.
Sehgal said: “Estimated EM earnings growth of 10.5 per cent in
2019, while below projections of 15.4 per cent for 2018, would
nonetheless compare favourably with estimated US earnings growth
of 9.5 per cent for 2019, down from 21.2 per cent for 2018."
The fund manager added that looking forward, the underlying
business and economic situation does not justify the scale of the
emerging market equity drop this year.