Her summary? There is value in emerging market equities, but investors should be taking a targeted approach.
An understatement…
“Emerging market equities have had a difficult time over the past few months,” she says. “As fund manager sentiment has turned extremely negative according to surveys such as the BAML Global Fund Manager, the question becomes whether this pessimism offers a good investment opportunity.
“A cursory examination of current valuations would suggest that emerging market equities are inexpensive both relative to their own history and also US equities,” she continues. “Based on the historic relationship between valuation and subsequent 12 month returns, emerging market equities as a whole are approaching historically attractive levels and therefore could generate significant returns in 2014.”
Upon closer scrutiny, however, it becomes apparent that particular themes such as those mentioned above are dominating valuations. On the flip side, manufacturing and consumption stocks are priced expensively relative to their history, Kyrklund noted. “The current divergence in the fortunes of the BRIC countries highlights the need to consider emerging markets in more targeted fashion rather than as a single bloc. Russia is the most attractive based on value and fundamentals, but despite the recent sell-off remains dominated by the political risk premium.”
BR propped up by IC
Brazil, meanwhile, offers little reward in terms of either valuation or momentum with the continued downward earnings revisions, in her view. “Elsewhere the signs are more encouraging from China and India. In the former the mini-cycles of stimulus and tightening offer tactical opportunities during the tricky road of re-balancing growth and deleveraging, whilst in the latter there is some momentum with the cheaper currency, improved current account deficit and anticipation of the election.”
Kyrklund sees the greatest opportunity in Asian emerging markets at present. “Thirty per cent of the MSCI Emerging Market Asia index is from China, whilst another 44% consists of Taiwan and Korea, countries we favour due to their robust fundamentals and participation in global growth.”
