By Nick Cowley
Nicholas Cowley, Portfolio Manager on the Global Emerging Market Equities Team, discusses current market valuations, the potential for a market correction and where the team is finding the best opportunities.
In terms of where we find the best opportunities in emerging markets at the moment, it has proven a bit of a challenge, the emerging market asset classes has done very well. The number of stocks has done extremely well this year. The number of good-quality stocks that traditionally we like and we favor have seen the valuations reach more stretched levels. So it is proving a challenge at the moment, but having said that, there are still pockets of valuation opportunities that we still see around the emerging market universe. The emerging market universe is pretty broad, so there pockets of valuations attractive in places like the Philippines. We are also finding good value in places like South Africa where there is political stress that is causing valuations to look quite attractive. And in Brazil, the market has done very well in the last six months, one of the better-performing markets. We still see good-quality companies there trading at reasonably attractive valuations. Earnings are still extremely depressed, given the state of the economic depression.
We are looking for good-quality companies available at a reasonable price run by management teams and owned by owners with a history of integrity and track record of delivery. We find it difficult to find companies where we feel we're truly aligned with the owners and the management teams. There is a lot of state ownership in China and it is often complex who really owns the company. These companies are often inefficiently run, they make decisions, strategic decisions that are perhaps being made by people higher up the political chain than the managers that we get to meet in company meetings. So there is a question of real alignment issues and quality of companies that we are investing in in China that means that we don't feel the need to have exposure there.
Are we concerned about a correction in emerging markets? I would say we are hopeful that there will be a correction in emerging market equities.
We don't think you should really look at a developed market company that differently from emerging market companies. There is a real gray area between the two in a lot of cases. A number of developed market companies have built strong businesses in emerging markets. A number of emerging market companies have built strong businesses in developed markets. So there is a real gray area. What we are trying to deliver to clients is exposure to growth in emerging markets. If we can get that through a developed market-listed company that has strong cash flows from its more mature businesses in the U.S. or in Europe, that is able to reinvest those cash flows in more exciting, dynamic growth opportunities in the rest of emerging markets, then that is a big opportunity for us. We find that a very risk-aware approach to giving our clients exposure to emerging markets. We always make sure that at least 50% of the company's economic activity, be it revenues, profits, volume, people are in emerging markets.
Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.
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