“Although the emerging markets have done very well in 2017, value [stocks in those markets] have lagged a lot,” Yeung, the Hong Kong-based portfolio manager of the firm’s Emerging Markets Value Equity Fund, told FSA. “To me this is one of the biggest disconnections in the market.”
Emerging market equities have had strong performance for two years, with the MSCI Emerging Markets Index up 90% since its low in late January 2016. “Most of the rally was brought about by emerging market growth stocks such as Tencent and Alibaba,” Yeung said.
“However, if you look back at history, whenever an emerging market economy recovers, value stocks start doing well because they are more tied to [market cycles],” he said. Such cyclical stocks include financials, airlines, metals and mining and the construction industry.
In the current recovery, value stocks have also gained, but they haven’t gained as much as growth stocks. “I think this is unjustified,” Yeung said. While earnings grew broadly across the sector, earnings multiples went up significantly for growth stocks, while those of value stocks did not. According to Yeung, value stocks are overdue for a rally and he believes his fund is well positioned to seize opportunity.
His optimism is based on macroeconomic and geopolitical factors. “Right now, emerging market governments and companies are making the right decisions,” he said. “They are tightening the belt, not chasing reckless growth.”
The delay in value stocks catching up with growth also has macroeconomic causes, in particular low interest rates and low inflation expectations. “Investors out there think that technology could [limit] inflation, that we will be in the deflationary environment forever. But I disagree. It’s just a normal business cycle. When we use up the excess capacity, inflation will start coming back. Value is going to work.”
Under-researched search
Yeung’s mandate allows him to invest in stocks from the MSCI Emerging Markets index universe, frontier markets such as Pakistan, Vietnam or Romania, and developed market companies that do most of their business in emerging markets, for example Standard Chartered.
Yeung looks for “neglected and forgotten” companies, not covered by research analysts. He would not buy a prominent company that has fallen on hard times and is temporarily underpriced. “I can’t add a lot of value there, because there are [many analysts] looking at it,” he said. “I look at companies that lack investors’ attention because they’ve been bad for a long time. We can go into those ideas and exploit that information asymmetry.”
Yeung manages his fund on a “70% bottom-up and 30% top-down” approach, he said. His top-down views don’t concern global or regional macroeconomics, but centre on “finding countries that people really dislike”.
The actual valuation analysis comes into play in his investment decisions after he has identified his under-researched targets, but he admits he thinks about value quite loosely. He would buy a company with low earnings and high P/E ratio, if it looks like the company’s future potential is under-appreciated by the market.
He stays away from over-invested and overpriced countries such as India or Philippines. While he’s generally underweight Asia-Pacific, he finds a lot of value in Eastern Europe, Latin America and South Africa. His fund is overweight in Brazil, Egypt, Russia and Romania, while being underweight in South Korea, Taiwan and India.
He notes that Brazil did very well since the ouster of president Dilma Rousseff in mid-2016. South Africa, Yeung added, is now in the process of ejecting its own controversial president accused of corruption, Jacob Zuma. He believes if Zuma is out of office, the country’s economy will benefit.
Despite the fund’s underweight in Asia-Pacific and the technology sector, its top holding (6.4% at the end of 2017) is Samsung Electronics.
Performance of the T Rowe Price Emerging Markets Value Equity Fund vs its benchmark and category average
