While equity returns of the past five years need to be separated from today’s outlook, given prevailing valuations, he believes equities can deliver solid returns to investors over the next two to three years.
Global equity valuations have moved far from the distressed levels seen at the beginning of 2012, yet with multiple expansion driving a large amount of equity return over the past year, investors need to look more specifically at where future value lies, said the manager of the Global Growth Equity Fund.
Berg's Luxembourg Sicav is $531m in size, and he has been maintaining a significant overweight position in EMs, especially via non-BRIC countries.
Long-term potential
"While this has generally been a challenging period for bottom-up stock pickers in the emerging world, our conviction regarding the long-term potential of many consumption-led EM economies remains high," he said.
Given the end of the commodity supercycle and the evolution taking place within many EM economies, the price-to-book derating for the MSCI Emerging Market Index since 2007 appears extreme, Berg believes, with the index trading close to Japan and Europe on a p/b basis.
"This is unusual considering our view of the long-term growth prospects for the region."
"While the emerging world has been spoken of as a single equity class, we would emphasise more than ever the importance of selectivity at country, industry, and company level. While correlations are temporarily elevated, the fundamentals of the emerging world are dispersing both near and long term," he added.
With EM well-placed for the next phase of global growth, Berg is seeing opportunities in the ASEAN region, certain high-quality banks and consumer staples or retailers.
"On a broader basis, we have also viewed the sell-off within EMs as an opportunity to improve the quality and shareholder friendliness of our holdings. Although experience tells us that EM stocks can always fall further than anticipated, we believe all but the most extreme scenarios are now largely priced into valuations.
EM financials
"We see EM financials as the most attractive way to benefit from superior economic growth rates and low-penetration levels in emerging markets relative to developed markets.
"Additionally, valuations have become widely attractive in the wake of concerns regarding the effect of rising US interest rates. We have also added to our positions in the technology sector – in order to benefit from the ongoing transition toward greater user mobility, increasing internet engagement, and growing technology consumption in EMs. These are all powerful long-term growth drivers."
