Value stocks in EM are finally showing their potential again following several months of global sell-offs.
Although developing world stocks were hurt by the removal of Russia from EM indices, concerns about regulation and growth in China, global inflation fears and rising risk aversion, the MSCI Emerging Markets Value Index has been more resilient.
For example, it fell by 8.1% in US dollar terms versus a 11.8% decline of the broader MSCI Emerging Markets Index and a 15.2% drop of the growth index in 2022, as of the end of May, according to AB.
“Despite these declines, EM value stocks have advanced by 10.5% since November 2020 through the end of May, outperforming both the broad market and growth benchmarks,” said Henry S Mallari-D’Auria, chief investment officer, EM value equities at AB.
Opportunities exist from Latin America to Asia, he added, where selective investors can find EM companies with unacknowledged business prospects that trade at a discount to developed-market peers.
Readying for a rebound
EM value stocks saw nearly nine years of underperformance up to November 2020, trailing the market by 28.1%. Ever-lower rates had spurred investor appetite in growth stocks and portfolios.
Yet AB points out that this had followed 143 months – between 2000 and 2012 – when EM value stocks outperformed the MSCI EM benchmark.
“While past performance doesn’t guarantee future results, we believe that supportive macroeconomic and market conditions have potentially set the stage for a prolonged recovery,” added D’Auria.
This view is also based on the fact that current valuations for EM value stocks still trade at a near-record discount to growth stocks. Further, value companies have delivered stronger earnings growth during this period.
“By identifying stocks with clear catalysts for a future rerating, EM equity portfolios can be positioned to withstand volatility and deliver long-term results. With a disciplined approach to valuation, investors can gain conviction to allocate or increase exposure to EM value stocks, with recovery potential powered by the same forces that are sowing uncertainty in markets today,” explained D’Auria.
Buying into diversity in recovery
Inevitably, many investors remain wary of EM amid ongoing global volatility and the potential knock-on effect of country-specific currency and political issues that can be common in EM.
As a result, investors should look to specific countries and companies. AB sees copper producers in countries such as India and Zambia benefitting from the shift to EVs, increasing electrification of economies and rising commodity prices.
In addition, financial firms in the Philippines and Vietnam enjoy a solid outlook driven by strong real economic growth.
Meanwhile, China’s growth concerns have also created opportunities.
“In our view, some real estate company valuations exaggerate the business risks and underestimate their recovery potential,” explained D’Auria.
At the same time, while predicting Chinese policy is difficult, the government’s net-zero commitment looks durable and has created opportunities in certain utilities with renewable energy businesses.
“We believe some Chinese auto company shares also look attractive, as their long-term earnings potential, which will partly be driven by substantial EV growth, is obscured by current Covid-19 policy restraints,” he added.
