09 Nov 2018
Emerging-market stocks came under renewed pressure in early September. A subsequent rebound, however, saw them rising by 4.5% from their lows and ending the month only slightly lower. The subsequent sell-off across global markets in October brought renewed falls, driving emerging-market indices below their September lows and down to levels seen early last year. Over the past 12 months, the MSCI Emerging Market Index is now down 10.8% in sterling terms1.
Despite this (global) volatility, there are reasons to believe that, relative to other regions, emerging markets do offer value. A lot of the issues that caused the deterioration in sentiment (worries of a trade war; the stronger dollar) are arguably now ‘in the price’. The dollar has stabilised and the Chinese central bank has added liquidity to the market, the effect of which we should see in the coming months.
The MSCI Emerging Markets Index now trades on a forward price-to-earnings (p/e) multiple of 10.4x, just above the lows of August 2015 and early 2016.
A modest multiple
MSCI EM 12m Fwd p/e
Source: Bloomberg as at 19 October 2018.
What these headline return figures and p/e multiples mask, however, is the recent outperformance of ‘value’ relative to ‘growth’: value has held up better growth in all market regions since the beginning of October. In emerging markets, however, value stocks have outperformed since the end of July. Perhaps that is unsurprising given the recent caution about the valuations of some defensive and technology stocks – and the rise in the oil price. But could it also signal the start of a long-awaited rotation away from growth and towards value?
In emerging markets, value has been doing better than growth since July.
Value vs. Growth by region using MSCI indices
Source: MSCI as at 24 October 2018.
If emerging markets as a whole are arguably trading on a low valuation multiple, then the Artemis Global Emerging Markets Fund is even cheaper. Our portfolio has an average forward p/e of 7.5x – a 28% discount to the market. This puts it close to its historic low in terms of its relative forward p/e (see chart below). And although the fund has outperformed its index in recent months, it has maintained a healthy discount. Its bias to value stocks continues to be a differentiator within its peer group.
The fund’s forward p/e relative to the index remains close to its lows
GEM 12m Fwd p/e relative to MSCI EM
Source: Bloomberg as at 25 October 2018.
By country, the fund’s largest overweight positions are in China and Russia and its largest underweights are in the technology-heavy Korean and Taiwanese markets. By sector, our preference is for energy, utilities and construction. We have less exposure to the more widely owned segments of the markets, such as technology and consumer goods.
Looking ahead, we feel the fund’s discount to the market should stand it in good stead. In our view, emerging markets continue to offer access to world-leading companies, often at far more attractive valuations than in the rest of the world.
1MSCI Emerging Markets, total return index. Sterling. 18 October 2017 to 18 October 2018. Source: Thomson Reuters Datastream