Low Valuations in Emerging Markets Often Signal Fear, Not Opportunity

During their recent episode, Taylor, Carlisle, and Juan Torres Rodriguez discussed Low Valuations in Emerging Markets Often Signal Fear, Not Opportunity. Here’s an excerpt from the episode:

Juan: Or, you can take it to sectors or individual companies. If you find a company trading less than five times, that company is potentially at the risk of bankruptcy or the sector is under a lot of stress. I don’t have the data in my head right now, but probably during COVID, you might have seen, at the sector aggregate level, something like that was pushed down a lot. Maybe energy or some of the industrial companies.

But yeah, in the context of emerging markets, your risk is around the country. A lot of the times, there is fear and uncertainty around a specific country or specific region, because something is happening that is creating that fear and uncertainty. And so, if you are very value driven, and you allow valuation to be your guide, and that’s your screening process, what tends to happen is that when there’s fear and uncertainty in one specific country, then your screen starts to populate with all sorts of companies in that specific country.

The one thing that I don’t get the quality growth side on emerging markets so much relative to value, but of course, I’m biased. But the reason I say that is if there’s fear and uncertainty, the market doesn’t care how good your company is. [Tobias laughs] It’s going to puke everything, the good and the bad. The fact that the company has very good management, or return on invested capital, or ROE or whatever is not going to save your capital from the fear and uncertainty and the pressure around it. And so, yeah.

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