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.