Value investors set to reap benefits of steady EM growth
Last year was a very successful one for emerging market equities, with earnings growth of 22 per cent helping to propel a 35 per cent leap in the flagship MSCI index, its strongest showing since 2009.
Perhaps unsurprisingly, most analysts expect something of a pause for breath in 2018: a more modest consensus earnings growth forecast of 14 per cent is suggestive of a more becalmed backdrop.
Life, though, can change fast in emerging markets. UBS, whose forecasts were previously a little below consensus, has sharply revised up its estimate for earnings growth this year to 18.8 per cent, based on aggregating the bottom-up forecasts of its army of EM analysts. This would represent a minimal slowdown from 2017.
And if UBS is correct, among the biggest winners could be downtrodden value investors.
Value stocks, typically defined as those with a low price-to-book or price-to-earnings multiple, have underperformed the broader emerging market index for each of the past six years, being trounced by flashy growth stocks by 19 percentage points in 2017 alone.
Yet, while it is far too soon to call a definitive changing of the guard, there are tentative signs of a style rotation. Since late November, the MSCI Emerging Markets Value index has risen 7.2 per cent, outstripping the 4.8 per cent return of its Growth equivalent.
This is in stark contrast to the situation in the US, where the S&P 500 Pure Growth index has continued to outshine its Value sibling, beating it by more than 3 percentage points.
The UBS numbers, though, hold out hope for value investors that the recent pick-up in their fortunes may be a sign of things to come.
One of its biggest calls is that the EM bank sector, which eked out modest earnings growth of 6.1 per cent last year, after two straight years of declining earnings, will see growth jump to 19 per cent in 2018.
Financial stocks have not always been seen as a classic value play but, as a result of their woeful showing in recent years, no less than five — China Construction Bank, ICBC, Ping An Insurance, Bank of China and Banco Bradesco — are among the 10 largest stocks in the MSCI EM Value Index.
Geoff Dennis, head of global emerging markets equity strategy at UBS, believes we are approaching a sweet spot for financials, an important sector that accounts for 24.3 per cent of the EM index, after a disappointing 2017.
Some countries, particularly those in the Gulf that run dollar currency pegs, will have to raise interest rates this year as the US tightens, allowing banks to improve their net interest margins, Mr Dennis says.
Moreover, credit cycles are beginning or are about to begin in Brazil, Russia, central Europe, India and parts of south-east Asia, he asserts, with the improving global economy providing a further tailwind.
Daniel Salter, head of emerging market equity strategy at Renaissance Capital, an EM-focused investment bank, also expects “quite a decent rebound” in banks’ earnings this year, arguing that bad debt levels should fall as a result of the synchronised global economic recovery, even as margins are no longer “crushed”.
Moreover, more widespread emerging market growth could encourage investors to favour broad exposure to these economies, potentially via banks, rather than having to seek out isolated, and expensive, fast-growing areas, such as technology or Russian retailers.
With 2017’s all-conquering IT sector unlikely to repeat last year’s heroics (UBS forecasts earnings growth will slow from 48.1 per cent to 19.3 per cent), some other value plays can come to the fore. UBS’s most bullish forecast for this year is for the beaten-up utilities sector, where forecast earnings growth of 32.5 per cent is a far cry from the 5.7 per cent contraction witnessed in 2017.
A style rotation is more than overdue. In December, the valuation gap between growth and value stocks, whether measured in terms of the gulf in price/book or price/earnings ratios, hit the highest level since comparable data began in 2006, although it has since narrowed a fraction.
The past 12 months also threw up another anomaly. During the four previous bouts of dollar weakness since 2002, EM value stocks comfortably outperformed growth ones, but that relationship broke down in 2017.
With many expecting the greenback to fall again this year, the previous pattern could reassert itself.
Valuation-wise, modestly higher interest rates would be expected to favour value stocks. As Mr Salter points out, fast-growing companies are largely prized for their anticipated future earnings streams, which are subjected to a steeper discount rate in a higher rate environment.
Mr Dennis believes that if financial stocks are in better shape, we will get rotation from growth to value “almost by definition”.
“There is something of a rotation in terms of where the earnings growth is going to come from and value has beaten growth since late November, when it became clear that the US tax reform was going to pass,” says Mr Dennis. “We are in a sweet spot of value beating growth.”
https://www.ft.com/content/9b389e6a-2794-11e8-b27e-cc62a39d57a0
Tidak ada komentar