Feature – Undervalued assets


While China has looked attractive on traditional valuation metrics for quite some time, clearly there is a high degree of political risk, surprise regulation and geopolitical uncertainty


weighing on prices. Peter Abrahams, Lane Clark & Peacock


stimulate the economy with cheap money – and China’s high savings rate, which has traditionally been poured into a now- foundering property sector.” He also notes that “while the property sector presents a macro- economic headwind, the relative unattractiveness of the asset class to the domestic investor may mean greater inflows into Chinese equity over the near term, particularly as capital con- trols make it difficult for Chinese investors to access overseas securities”.


Emerging value


Another keen observer on the undervalued nature of assets is Gustavo Medeiros, head of research at Ashmore, who says three emerging market asset classes remain “very underval- ued”. These he lists as: emerging market equities, emerging market local currency bonds and emerging market high yield sovereign debt. Medeiros notes that emerging market equities are trading at a large discount to US stocks, which, is “not justified by funda- mentals”. Such equities account for 12% of the MSCI All Coun- try World index, while 34% of the revenues from the indices are derived from emerging markets, that contrasts with the United States which accounts for 61% of the index, but only 31% of global revenues.


That is then reflected in the price-to-earnings multiple of MSCI Emerging Markets trading at 12.5 times earnings, much lower than the S&P500’s 19.3 times. Moreover, there are specific opportunities within emerging market equities that stand out. Small and medium companies within the “technology supply


22 | portfolio institutional | July-August 2023 | Issue 125


chain in South Korea and Taiwan are interesting opportunities of capturing the future potential AI growth,” he says. Sharing Abrahams belief in the potential of China, Medeiros says Chinese stocks remain undervalued reflecting broad- based pessimism for the economy, even though policymakers stand ready to ease monetary and fiscal policies.


Large discount


In addition, Latin American stocks are also trading at a large discount to their historical valuations. The price-to-earnings multiples in Brazil, Chile, Colombia and Peru are between 1.5 and 2.5 below their 15-years mean and even Mexico trades at one standard deviation below its own mean, despite its strong macro performance and significantly benefiting from nearshor- ing of manufacturing production. Not stopping there, Medeiros cites the South African and Malaysian stock markets as also trading at a large discount to their mean value. While Indonesia and India valuations are not necessarily “cheap, both countries have secular growth stories” that is likely to keep their equity markets as a bright spot in the medium to long term. Within emerging market fixed income, emerging market local currency bonds are outperforming, rising 7.8% year-to-date with emerging market currencies rising by 2.7% against the dollar over the same period. Here, an important factor is that local bonds are benefiting from the fact that most emerging market central banks were fast to react to inflationary pressures, with some hiking policy rates already in the first quarter of 2021.


This was in sharp contrast with the large developed market central banks that postponed their hiking cycle to 2022. And some analysts have noted that these developed markets are suf- fering now as a result.


The broader benefit is that inflation has declined first and fast- er in most emerging market countries. This means that some central banks, such as those in Brazil and Indonesia, are able to cut policy rates in the second half of 2023 while China and Vietnam have already started as their economies are affected by the slowdown in global manufacturing and poor sentiment.


US imbalance Looking forward, Medeiros believes that the massively overval- ued and imbalanced US dollar is “likely to sell-off”, which should allow for further gains in emerging market currencies. To complete the emerging market undervaluation outlook, sev- eral high-yield countries in the developing world are also trad- ing at distressed valuations. The jury on whether these are “cheap” or “expensive” markets will depend on which countries implement much needed fiscal and economic reforms to improve their debt and balance of payments situation, allowing


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52