Raheel Altaf, manager of the Artemis Global Emerging Markets Fund, talks about current conditions in emerging markets and how the fund is positioned.
Investors are currently more underweight emerging markets than they have been for the past 10 years. Why? And what could cause this to change?
The headlines are not encouraging. Amid reports of trade wars, the rising dollar and another crisis in Argentina, August saw emerging markets suffering their biggest outflows since 2016. More generally, fears about a slowdown in global growth tend to hit emerging markets harder than other areas. Negative news stories tend to lead to an indiscriminate sell-off of emerging markets.
Investors are very underweight
EM weight in indices and global funds
Source: EPFR Global, Refinitiv DataStream, HSBC 'Monthly GEMs Equity Flows' report as at 31 August 2019.
Yet if you look beyond the headlines, the story is very different. Yes, global growth is slowing down, but emerging markets’ growth is still outstripping developed markets. Trade wars are negative for everyone, but thanks to a strong domestic economy, China is far less dependent on exports than it used to be. And while Argentina is very good at attracting headlines, its equities make up only around 0.1% of the MSCI EM index so it is hardly an indicator for the health of EM equities in general.
Of course it is very difficult to identify what the catalyst will be for investors to start returning to emerging markets, but we would highlight that in valuation terms they are trading close to their relative lows with developed markets.
Where are you finding the most attractive opportunities at the moment?
Value stocks (those that trade on below market averages) have been trading at unusually depressed levels across global markets. Yet conditions faced by value stocks in emerging markets are much more positive than for their counterparts in developed markets.
Favourable demographics, increasing urbanisation and the need to invest in infrastructure mean the growth prospects for, say, a Chinese cement manufacturer look far brighter than for its European or Japanese equivalent. So we are focusing our attention on those value stocks which also have good growth characteristics. There have recently been signs that value is starting to recover.
There is currently a wide dispersion in valuations between different countries in the EM universe. Which countries is the fund favouring and why?
The fund is overweight China, in particular to domestically focused stocks in the ‘A’ shares market, which we think offer good value. They were first included in the benchmark MSCI EM index in 2018 and their weighting in the index is set to increase. ‘A’ shares have a domestic focus and so tend to be geared to the Chinese consumer.
Elsewhere in China, we don’t have exposure to the large internet-related stocks such as Tencent. We also favour cheaper markets like Turkey and Russia. In the latter, we hold energy companies, which are trading much more cheaply than their developed market counterparts. They are also showing attractive trends such as increasing dividends.
We have been underweight India for some time because we think it is expensive. This may change as over the past year it has underperformed and so we are now seeing some opportunities. The fund has a low exposure to technology and as a consequence is underweight tech-heavy countries like Taiwan and Korea.
What about sectors?
In an environment of slowing economic growth, we need to hold some more defensive stocks and so we are overweight telecoms and utilities. But we have much less exposure to areas we view as ‘expensive defensives’ such as healthcare and staples. For more cyclical exposure we prefer transportation and capital goods. As previously mentioned, the fund has low exposure to technology.
In the China ‘A’ shares market, headline valuations are cheap but is this not partly a reflection of poor corporate governance?
Chinese corporate governance has been a major concern for many years. We think it is improving, but investors still need to be cautious. Out of approximately 3000 ‘A’ shares, there are only 700 that make it into our investible universe and far fewer that we think have adequate governance. We carry out thorough due diligence on them.
Given your current focus on value stocks, how does the fund’s overall valuation compare to the market?
In the current environment, we are finding lots of cheap stocks with improving fundamentals. As a result, our fund is trading on a price-to-earnings ratio of 7.5x, a 36% discount to the market. This is the biggest discount since the fund was launched.
To find out more about the Artemis Global Emerging Markets Fund and its positioning visit the fund page at www.artemisfunds.com.
THIS INFORMATION IS FOR INVESTMENT PROFESSIONALS ONLY. IT IS NOT FOR USE WITH OR BY PRIVATE INVESTORS.
The fund is a sub-fund of Artemis Investment Funds ICVC. For further information, visit www.artemisfunds.com/oeic. Third parties (including FTSE and Morningstar) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data. Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness. Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice.
Issued by Artemis Fund Managers Ltd which is authorised and regulated by the Financial Conduct Authority.
