EM equities: less popular markets offer long-term opportunities

05/06/2018

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​Glen Finegan, Head of Global Emerging Market Equities, believes that less popular markets such as South Africa offer better value than many Asian opportunities.

Where are you finding the most exciting opportunities within emerging markets?

For some time we have been highlighting our view that valuations of many good-quality Asian companies are too high and unsurprisingly this is reflected in our current positioning.  Meanwhile, significant changes have occurred recently in South Africa where emerging middle class voters are demanding less corruption and improved living standards. Following Cyril Ramaphosa’s appointment as President we have observed an improvement in the confidence of South African company management teams and expect to see private investment pick up after a long period of stagnation.  We view these developments positively and believe that South Africa provides a fertile ground for investors focussed on the long term.

Has economic reform in China influenced portfolio positioning?

The portfolios we manage currently have limited investment in Chinese equities. This is due to the presence of a large number of state-controlled enterprises, which raises concerns about the company’s alignment with minority shareholders. Against a government policy backdrop focussed on debt reduction, there is also a significant risk of large, cash-rich private corporations being required to perform ‘national service’ rather than focusing on sustainable growth and returning profits to shareholders. We have also observed some questionable capital allocation decisions by China’s leading internet companies during the last 12 months.  Having said that, while the opportunity set within China for long-term investors with an absolute return mindset has been limited, we are building a watch list of interesting companies listed in China’s domestic ‘A’ share market (foreign investors can also gain access to Chinese companies listed in Hong Kong on the H-share market). Although currently high valuations mean we have yet to invest.

What are your expectations for the asset class?

The past 12 months have generally seen continued enthusiasm for risky assets, including emerging market equities. A number of low-quality and more economically-sensitive company valuations appear to be pricing in a continuation of favourable economic and monetary conditions for a significant period of time.

In our view, financial markets are at risk of being overly optimistic and in the face of this complacency, we continue to believe that it is important to not compromise on quality, maintain a long-term approach and  apply a strict valuation discipline.

We are positive, however, about the prospects that emerging markets offer equity investors on a long-term view. This is due to the opportunity to gain exposure to the strong structural trend of rising living standards in certain parts of the developing world.

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

Janus Henderson Emerging Markets Fund

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.

Risk rating

Janus Henderson Emerging Markets Opportunities Fund

Specific risks

  • 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.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • 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.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.

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