Value Investing Is Finding Favor in Emerging Markets

The pull of value is strong as vaccine developments fuel optimism about a global recovery—and that extends to emerging markets as investors start shifting to more neglected parts of the market that could be well-positioned for a rebound.

As investors start thinking about inflation and rising interest rates while corporate earnings stay relatively strong, Gavekal Research’s Will Denyer in a research note on Monday sees a case for investors to shift toward value and Covid losers, which augurs well for foreign markets that are tilted more toward both than in the U.S. and have the added benefit of more attractive valuations.

China’s red-hot market has felt the shift toward value, with the CSI 300 falling about 7% since Feb. 10. The decline was driven by an almost complete reversal of the earlier risk-on toward factors like quality, profitability, momentum and growth as just about everything other than value dragged on portfolios, writes Puneet Singh, head of APAC quantitative strategy for Société Générale, in a note on Monday.

“China is finally catching up with global markets and relinquishing its focus on defensiveness: it is finally acknowledging that value stocks are the way to go as the economy recovers despite softer data points,” Singh writes.

Higher bond yields could be contributing to what Herald van der Linde, HSBC’s head of Asia Pacific Equity Strategy described as a modest wobble in Asian equities. But he doesn’t see a crash ahead, with a cyclical recovery, a weaker dollar and stronger commodity prices all supportive to Asian stocks, van der Linde says in a note on Monday.

If U.S. growth accelerates without pushing bond yields too high, van der Linde sees another move higher in Asian stocks. Markets like Taiwan and Korea are more susceptible to higher rates, with India and mainland China less vulnerable, according to van der Linde.Within India, Jack Nelson, who manages a sustainable emerging-markets equity strategy for Scotland’s Stewart Investors, which oversees almost $21 billion, favors consumer-oriented companies like Dabur India (500096. India), noting its strong brand and long growth trajectory as incomes rise. Consumer-oriented stocks are also well-positioned as India’s economy recovers from the pandemic and an aggressive spending budget. Nelson also owns Kotak Mahindraa Bank (500247. India), which should emerge from the pandemic stronger and capitalize on the growth ahead in a country where most still have their savings in gold and housing, Nelson tells Barron’s.

Fund managers like Alberto Fassinotti, a managing director of global investment firm RockCreek, is taking a barbell-like approach. While Fassinotti tells Barron’s he continues to favor North Asian stocks that have done well technology giants like Taiwan Semiconductor Manufacturing (TSM) and Samsung Electronics (5930. Korea), he has been adding to traditional cyclical stocks, including selectively to metals and mining companies well-positioned to meet alternative energy demands for nickel, cobalt and lithium, including investments in Chile and in Brazil’s Vale (VALE), the second largest producer of nickel.

For context, the iShares MSCI Chile exchange-traded fund (ECH) is up 6% in the past month; the iShares MSCI India ETF (INDA) is up 4%, while the iShares MSCI China ETF (MCHI) has fallen 1%, returning some of its recent gains.

Only time will tell if the shift to value is sustainable but performance so far may be enough to merit at least a reassessment of the parts of the market that have been neglected in recent years.

Reshma Kapadia

source:investing.com