Value Investing Reigns in Emerging Markets – WSJ

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Always on the look out for the latest news on value investing, I found this piece in today’s Wall Street Journal titled, Value Investing Reigns in Emerging Markets.

Lets take a look…

Carolyn Cui writes:

After a long period of miserable performance, investors who seek out some of the least popular stocks in emerging markets are back on top this year.

These value investors manage funds that focus on stocks that look cheap based on metrics like price-to-earnings ratios. Most investors in rapidly developing but volatile emerging markets pursue growth strategies, looking to identify companies that can deliver above-average earnings momentum.

Heading into 2016, value investors trailed growth emerging-market investors in four of the past five years. From 2011 to 2015, emerging-market value funds lost 38%, while those with a growth tilt fell 21%, according to data from MSCI Inc.

But this year, value funds in emerging markets are up 20%, beating the 15.5% gain in the broad emerging-market index, according to Morningstar Inc.

With stocks known for wild swings, these gains could prove fleeting if the dollar strengthens or if the Federal Reserve raises interest rates. This year’s emerging-markets rally has been fueled by low global interest rates that sent many investors searching for yield, despite erratic growth in the developing world.

Some analysts say the revival of value strategies could be a sign that developing economies are getting back on track, since value stocks tend to outperform when economies are expanding.

Earnings forecasts have turned positive in many emerging countries, especially Brazil and South Africa, after years of consecutive downward revisions, according to the Institute of International Finance. On average, emerging-market companies’ 12-month earnings estimates increased 5% so far this year, the IIF said.

The rally “is starting to look more believable,” said George Iwanicki, an emerging-market macro strategist at J.P. Morgan Chase & Co., adding the fund he oversees has begun to allocate more assets to value stocks.

Some of the best performers include GMO LLC, Brandes Investment Partners and Pzena Investment Management, each with an emerging-markets fund up more than 20%. They have boosted their returns by loading up on beaten-down stocks that even many emerging-markets investors avoid, like Brazil’s big oil company, Russian banks and a South African chemical company.

More broadly, value funds have outperformed growth funds this year in emerging markets and small-cap stocks, while it has lagged behind growth in many developed markets, according to data from Brandes.

Even with this year’s outperformance, value investors are hard to find in emerging markets. Only nine, or 4%, of the 245 emerging-market equity funds say they pursue a value strategy, according to Morningstar. By contrast, 28% of the funds that invest in U.S. large-cap stocks are value-oriented, Morningstar said.

While many academic studies show that value strategies tend to outperform over the long run, most emerging-market managers deploy a strategy called “growth at a reasonable price,” a blended approach that considers both growth and price.

“It is a strong conviction: There’s no value in emerging markets,” said Jean-Louis Scandella, head of global equity at Barings. “To have value, it means you have accumulated profits and assets. Emerging markets don’t have that. When they’re cheap, that’s because they’re not worth more.”

Gerardo Zamorano, a portfolio manager of the $1.2 billion Brandes Emerging Markets Value fund, said that value works in emerging markets over the long term. His fund is up 28% this year, beating 98% of all the emerging-market funds.

Some funds are new converts to value in emerging markets. Seafarer Capital Partners LLC recently joined this camp, launching a value-focused emerging-market fund in May to complement its growth fund. T. Rowe Price Group Inc. also launched a value fund in emerging markets a year ago, focusing on finding companies that take actions to improve corporate governance.

Seafarer founder Andrew Foster said that in the past, legal and financial systems in much of the developing world didn’t go far enough to protect minority-shareholder rights. That made a value-oriented approach challenging. But as those structures improved, it gave him greater confidence that “value will eventually be realized.”

Some say the past few years of underperformance resulted from the low-growth period and unprecedented central-bank policies to stimulate growth. “In this environment, any company that can grow their earnings, such as high-tech companies, has been rewarded by the market,” said Arjun Divecha, head of GMO’s emerging-markets equity team.

The $5.2 billion GMO Emerging Markets fund owns shares in big banks like India’s HDFC Bank Ltd., China Construction Bank and Sberbank of Russia. Mr. Divecha also likes Taiwanese technology companies, which supply Apple Inc. and other companies.

The Pzena Emerging Markets Value fund is up 22% this year, thanks to its holdings of oil companies such as Petróleo Brasileiro SA, South Africa’s Sasol Ltd. and Russia’s Gazprom. It also owns shares of South Korea’s Samsung Electronics Co., whose memory business is undervalued, said John Goetz, co-chief investment officer at Pzena, which manages $2.4 billion in emerging-market value strategies. “It has been a long, hard run in value,” he said.

For those who remain true to value throughout the years, “you just wait, wait and wait,” Mr. Divecha said. “People think you’re an idiot.”

You can read this article on the The Wall Street Journal website here, Value Investing Reigns in Emerging Markets – WSJ.

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