Emerging Markets Investing: More than a Multiple

The Growth vs. Value Debate

Since November of 2020, value stocks have rallied in anticipation of a global economic recovery in 2021. Additionally, the recent US bond yield spike has undermined risk appetite, especially for Growth stocks. In light of this, investors have discussed the possibility of a value run; however, we believe this is more of a developed market (DM) story than an emerging markets (EM) one. The MSCI EM Value Index has only outperformed the MSCI EM Growth Index by 181 basis points (bps) over the last three months, as of February 28th, 2020 – while both styles have rallied. The “great rotation” from growth to value has made many headlines but has not been evident in EM equities.

With a low base of earnings, unmatched natural resources, and attractive demographics, we believe EM should be considered a growth basis asset class. Further, we believe that within EM, growth may continue to outpace value over the long-term.

graph1 growth v value.pngPast performance does not guarantee future results. You cannot invest directly into an index.

Investors should be careful of over-focusing on value in EM, as value in EM is largely represented by either asset-heavy highly-cyclical commodity or manufacturing businesses, state-owned enterprises (SEOs), or both. The combination of these traits within a very dynamic asset class could lead to a value trap.

The goal of investing, in general, is finding a company trading below its intrinsic value. Growth investors look for companies that find that disconnect but also have the potential to benefit from bright futures with strong earnings and reinvestment prospects.

A Dynamic Asset Class

Historically, EM economies centered around manufacturing and commodities, broadly reliant on cheap exports of natural resources to DM. Over the last decade, the asset class has evolved towards services, creating new opportunities for growth in healthcare, education, entertainment, housing, financial services, discretionary spending, and more. Today, EM has presented higher gross domestic product (GDP) growth rates, higher earnings-per-share (EPS) growth, higher dividend yields, and similar returns at a significant discount to DM. As a cyclical asset class, EM benefits from some of the same drivers recently pushing DM value companies. On a forward price-to-book basis, the broad asset class already trades at a 35% discount to DM as of December 31, 2020. Looking deeper within the EM asset class, though, true “value” should come from high return profiles and growth rates relative to the cost of capital – not just low multiples on a standalone basis.


DEFINITIONS

MSCI Emerging Markets Value Index captures large and mid cap securities exhibiting overall value style characteristics across 27 Emerging Markets (EM) countries.

MSCI Emerging Markets Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across 27 Emerging Markets (EM) countries.

Basis Points (bps) is a unit that is equal to 1/100th of 1% and is used to denote the change in the value or rate of a financial instrument.

Earnings Per Share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

Intrinsic value is a measure of what an asset is worth and refers to some fundamental, objective value contained in a financial asset.

Price-to-Book (P/B) Ratio measures the market's valuation of a company relative to its book value.

Value is the monetary, material, or assessed worth of an asset, good, or service.

Value Trap is a stock that appears to be cheaply priced because it has been trading at low valuation metrics for an extended time period. The danger of a value trap presents itself when the stock continues to languish or drop further after an investor buys into the company.

The views and information discussed in this brochure are subject to change and may not reflect the current views of the writer(s). The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation.

Past performance is no guarantee of future results.

Investment Considerations — There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential of loss of principal.

Emerging Markets Risk — The risks of foreign investments are typically greater in less developed countries, which are sometimes referred to as emerging markets. For example, political, legal and economic structures in these country may be changing rapidly, which can cause instability and greater risk of loss. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluation, which could hurt their economies and securities markets. For these and other reasons, investments in emerging markets are often considered speculative. Similarly, investors are also subject to foreign securities risks including, but not limited to, the fact that foreign investments may be subject to different and in some circumstances less stringent regulatory and disclosure standards than U.S. investments.

Market Disruption and Geopolitical Risk — Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, natural and environmental disasters, systemic market dislocations, public health crises and related geopolitical events have led, and in the future may lead, to increased market volatility, which may disrupt U.S. and world economies and markets and may have significant adverse direct or indirect effects on the value of a Fund and its investments.