Global emerging market investors often overestimate corporate growth potential and overpay for the comfort of quality
A good company at a bad price is not a good investment
Samuel Bentley, client portfolio manager, Eastspring Investments
Growth stocks are alluring when macro conditions are challenging. Global investors have flocked to emerging markets in recent years, favouring high-growth stocks, particularly in the tech sector. Consensus leads to congestion and eventual disappointment, says Samuel Bentley, client portfolio manager at Eastspring Investments.
"The majority of our peers follow a growth and quality approach. Nobody wants to overpay for a stock, but investors have a tendency to overestimate long-term growth potential and overpay for the comfort of quality," he says.
Long player
Historical data shows that a value approach like that deployed by the Eastspring Investments global emerging market equity team delivers the best results, even if performance may lag when value is unpopular.
The emphasis is on buying good companies at the right price, irrespective of whether they are growth, ex growth or defensive.
"We try to remove behavioural biases from our approach. Prices tend to move on emotional responses in the short term, with little relevance to long-term performance," says Bentley.
The Eastspring global emerging markets team does not ignore such fluctuations, however. Movements are monitored against the team's long-term valuations.
Big differentials can occur when whole countries or sectors fall out of favour, indicating a good time to look at selected stocks.
Rather than constantly monitor a universe of more than 1,000 eligible stocks, the team digs deeper when strong price signals are detected.
"We fish in the dirty end of the pond, looking for the reason for a sell-off. Around 80% of our research is qualitative as we need conviction in our belief. It is a contrarian approach but we need certainty," says Bentley.
The result is a portfolio that looks very different from its peers. Many other managers are benchmark aware or cap volatility, limiting their investment choices.
"Investors like to hear stories that sound familiar such as Modi and reform India, for example. It is easy to overpay but a good company at a bad price is not a good investment," warns Bentley.
The Eastspring global emerging markets team is often early. It invested in Russia and Brazil in 2015, while others waited for a consensus view and sustained upward momentum. By the time others came back into the market, the Eastspring strategy had already made good money.
Investors had also been used to paying a premium for Mexican stocks. The election of Donald Trump killed off the sentiment that the country was a defensive, stable play. When others fled, the Eastspring global emerging markets team increased its position from underweight to neutral.
"Ours is an attractive strategy for investors needing to diversify their exposure to global emerging markets," says Bentley.
A waiting game
Bentley believes emerging market value stocks still have some way to climb. They remain cheap relative to the US and Europe, but investors need to be selective.
There is still a wide dispersion between value and quality. Earnings are rising on the back of capital expenditure cuts and restructuring, leading to improvements in returns on capital. The Eastspring global emerging markets team will happily wait until the price is right.
To find out more visit eastspring.com/GEM
Important information: For professional clients only. Issued by Eastspring Investments (Luxembourg) S.A., UK branch, 125 Old Broad Street, EC2N 1AR, London, authorised and supervised by the Financial Conduct Authority. This information is prepared by Eastspring Investments (Singapore) Limited, acting as portfolio manager of Eastspring Investments. Eastspring Investments qualifies as a UCITS. Eastspring Investments - Global Emerging Markets Dynamic Fund is a sub-fund of Eastspring Investments. The value of an investment is subject to investment risks, including the possible loss of the principal amount invested. The value of shares in any sub-fund of the SICAV and the income accruing to the shares, if any, may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the SICAV.
