The millennial wealth gap
I was in a meeting this week when the subject of ‘millennials’ came up. And, shortly into the...
Four of the five cheapest stock markets in the world today are in emerging markets, according to analysis by the publication Investment Week*. Russia, Turkey, Poland and Korea are joined in the ranking by sole developed market Spain.
Turkey has been the worst performing market of the five year-to-date and is down 26.5%**. It is followed by Spain (-19.8%**), Russia (-18.2%**) and Poland (-13.8%**). Only Korea is in positive territory with returns of 2.75%**.
Ian Simmons, manager of Magna Emerging Markets Dividend, explained why these cheap valuations could be interesting for investors:
“Emerging market banks have continued to cut interest rates over the past year. The resulting record low interest rates on savings accounts has not gone unnoticed by domestic savers and we have seen an impressive increase in domestic participation in stock markets from Brazil, Russia, Turkey and Korea.
“This will be supportive for valuations, even while many foreign investors are focused on matching the NASDAQ’s returns – foreign investor flows in emerging equity markets have been negative in every single week of 2020 to the end of June. Most historic liquidity-driven equity rallies develop a ripple effect, as relative valuations in the markets that have been left out of the rally become ever more attractive.”
In his recent podcast, Edmund Harriss, co-manager of Guinness Emerging Markets Equity Income fund, told us that emerging Europe – home to three of the cheapest markets – was now starting to present some interesting opportunities, aided by the fact that the European Union, its largest trading partner, was working together in a way it has not done for years.
Turkey and Poland are not so popular amongst Elite Rated managers. M&G Emerging Markets Bond has a small allocation to Turkey (1.49%***), as does Federated Hermes Global Emerging Markets SMID Equity (1.32%^), while newly rated Aubrey Global Emerging Markets Opportunities fund and ASI Global Smaller Companies, have 3.1%^ and 2%^ allocations to Poland respectively.
Richard Hodges, manager of Nomura Global Dynamic Bond, commented: “If you look at Russian dynamics, either from a growth or from a debt perspective, and compare those relative to the UK, I would argue that it is in a much better position. Russia’s growth has been very similar to the UK and Russia debt to GDP – this is the total amount of debt that Russia has as a percentage of the total amount of money the economy is worth – is only around about 15% to 20%. Put this into context everywhere else, including the UK, and you’re looking at the high eighties and in some European countries, you’re looking at above 100%.
“10-year Russian debt, for example is yielding about 5.5%, whereas in the UK you are getting a tenth of that, if you’re lucky. And Russian interest rates could be cut by another 1%, and bonds would still be yielding significantly more than the UK. And that means we have a much greater capital opportunity of generating positive returns out of the likes of Russia.”
Kunjal Gala, co-manager of Federated Hermes Global Emerging Markets SMID Equity, who, in addition to his small Turkey allocation has 7.25%^ in Russia and 8.3%^ in Korea, told us that while the likes of Russia, South Africa, Turkey and Latin America used to be very large, meaningful components of the emerging market benchmark, they had not made the most of the ‘good’ years and had failed in to invest in infrastructure or reforms.
“As the world moves ahead in a low carbon economy, resource intensiveness is going to decline. And, unfortunately for Latin American, emerging Europe, Middle East and Africa, they haven’t really benefited or made very good use of the upside that they had for many years from rising commodity prices. These economies have much fewer prospects, while Asia has become much more attractive with a sizable middle class and good digital and physical infrastructure.”
So, outside of Asia, Kunjal says individual stock-picking is vital to identify a handful of good quality companies that are thriving even in a difficult environment, adding to their capabilities and becoming more competitive.
Listen to more of Kunjal’s view on emerging markets in this podcast.
As Richard Sennitt, manager of Schroder Asian Income, told us in a recent interview, continuing trade wars and issues over 5G mean we are likely to see an increased bifurcation of the supply chain between Asia and the US, “But I think that’s not necessarily negative for Asian tech companies from Korea and Taiwan, as they actually supply to both chains and, ultimately, someone will have to produce this kit,” he said.
“The IT manufacturers that I own are principally based in Taiwan and Korea, and they are the beneficiaries of a couple of interrelated themes, such as the increased long-term use of the internet – which is obviously seeing a continual build out of data centres by the hyper-scalers as more and more data shifts into the cloud – and the increase in demand for communication products driven by this whole shift to 5G and the internet of things.”
A number of Spanish companies are held by the likes of Montanaro European Income (6%^), Comgest Growth Europe ex UK (6.8%^) and Fidelity Global Dividend (6.2%^). But the Elite Rated fund with the largest exposure is Jupiter European with a 9.4%^ allocation, including Amadeus, the Spanish IT provider for the global travel and tourism industry, which is in the fund’s top ten.
There is hope that Spain’s fortunes will be helped by the introduction of the EU Recovery fund, which will hopefully stimulate a number of European economies, but the Spanish market faces headwinds as it is dominated by sectors such as banks, telecoms, construction and travel which have had pricing power eroded by the internet and increased competition. However, the country is home to some excellent companies which good stock-pickers will be able to identify.
*Using the Barclays Historic CAPE Ratio indices, which track 26 global equity markets’ cyclically adjusted price to earnings ratio (CAPE). The CAPE is determined by taking an inflation-adjusted price index of an equity benchmark and dividing it by the moving average of the preceding ten years of equity benchmark earnings. Correct as of 30 July 2020.
**Source: FE Analytics, MSCI indices, total returns in sterling, 31 December 2019 to 5 August 2020
***Source: FE Analytics, as at 6 August 2020.
^Source: Fund factsheets, as at 30 June 2020