Emerging market equities in 2017: long-term opportunities but risks remain



​Glen Finegan, Head of Emerging Market Equities, continues to believe that a long term, risk-aware approach that focuses on the fundamental trends within a business is more important than trying to predict fluctuations in the wider economy.

What lessons have you learned from 2016?

2016 has confirmed our view that understanding fundamental trends within a business are a more predictable means of valuing a company’s equity than trying to predict fluctuations in the wider economy.
The year has also reinforced our view that it is important not to compromise on quality, to maintain a long-term view and to apply a strict valuation discipline. Emerging markets (EMs) can be more volatile than developed markets and we believe this requires a risk aware stock-picking approach that seeks to preserve as well as grow capital.

What are the key themes likely to shape the markets in which you invest in 2017?

The fact many EMs have immature legal and political systems often means inadequate levels of minority shareholder protection and higher levels of economic volatility. This is why we believe it is important to focus on the highest quality companies, and think more about what can go wrong than what might go right.

For 2017 and beyond, the longer-term opportunities for investment in some EMs are significant and well documented. Supportive demographic trends, such as population growth and a rise of the middle income consumer, are driving demand for a broad range of products and services that those of us in the developed world take for granted.

What are your highest conviction positions moving towards the new year?

Sector and country allocations within the portfolio are determined by stock selection and we search for good-quality companies with strong long-term prospects. A strict valuation discipline means we are often more attracted to those quality businesses which perhaps face a dull outlook or even some short-term headwinds. As a result our portfolios tend to look very different to the benchmark and many competitors.

Currently, we believe some well-run South African businesses trade at reasonable valuations.  All of our South African companies are expanding their operations into Africa, which may mean they can grow revenues and earnings for a long time. 

Generally, we avoid state-owned corporations and as a result we have a relatively low exposure to Chinese companies, which, in our view, are often hindered by a lack of alignment between foreign minority shareholders and the government. Even when we come across a healthy state-owned company on a reasonable valuation, we worry it may be asked to do ‘national service’ in an attempt to shore up the economy and protect jobs in uncompetitive industries.

Instead we seek to invest alongside controlling shareholders and management teams with proven track records of integrity and strong financial returns. Our preference is for companies with long-term owners, sometimes a family group, whose wealth is invested in the same equity as that available to third party investors. This provides comfort that our interests are aligned.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Emerging Markets Fund

The Janus Henderson Fund (the ""Fund"") is a Luxembourg SICAV incorporated on 26 September 2000, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

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Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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