At a recent Fund Selector Asia Forum held in Malaysia, investment managers revealed some key strategies ranging from the best approach to getting the most out of the high yield bond market to capitalising on the opportunities in the emerging market space.
Notwithstanding the external and local political risks faced by emerging markets, fund managers have taken a fancy to these stocks as they believe the structural story still remains intact and valuations have turned appealing enough to encourage cherry picking of stocks with a longer investment horizon.
Addressing a forum of fund selectors and wealth managers, Noriko Kuroki, client portfolio manager, J.P. Morgan Asset Management said: “Emerging markets are cheap not only in terms of historical valuation range but even against developed markets. In terms of 10-year price-to-earning multiples, emerging markets are trading at a very attractive level, well below the long-term average.”
The vulnerability of emerging markets was witnessed last year when investors pulled out massively as talks loomed over the US Federal Reserve’s gradual withdrawal of monetary stimulus, dragging down stocks and currencies.
Kuroki highlighted the concept of income investing, saying it “has become a viable strategy in emerging markets with more than 90% of corporates giving dividends and more increasing dividends as well."
“Dividend investment works in emerging markets”, she said, highlighting her strategy of combining high growth and dividend stocks as the latter fares well when markets are falling but are not able to catch the trend in rising market.
“Stocks with high yield and growth have consistently outperformed historically, with EMEA and Latam offering attractive income investing opportunities. We look for cyclical high yield stocks in markets like South Africa as they are pretty strong in terms of corporate governance and gulf markets like Saudi Arabia and Qatar and these are good source of dividends.”
She was cautious on Malaysia as valuation appears expensive, and said she would wait for right entry opportunity in some small-caps.
Talking on similar lines was Projit Chatterjee, managing director, senior equity strategist, UBS Global Asset Management who advocated emerging market investments as the right opportunity for those investors for whom the appeal to bonds has diminished due to upward rise in rates.
“Valuations are compellingly attractive in EMs. If you add allocations the during period of low valuations, you come out ahead over to medium-to-long term. Over the next one-to-three year perspective, you have a good chance.”
Apart from emerging markets, Chatterjee also favoured investing in China following the extensive reform agenda unveiled by the government last year and expects consumer staples and healthcare sectors to be the “strong” beneficiaries, He likes technology and internet companies, but has an underweight stance on financials.
Another theme that appealed to him, was small and mid-cap companies in Asia which he believed has a strong outlook than larger caps and are less impacted by macroeconomics or government interferences.
Kuroki said JP Morgan would also tend to play more through retail, consumer discretionary and consumer staples in China, and clearly avoid state enterprises. In India, she prefers betting on companies in IT outsourcing space and private banks.
European Equities
Even as Asia and emerging markets dominated the investment theme, Daniel Hemmant, senior portfolio manager, European equities at BNP Paribas Investment Partners highlighted the reason to be in European equities.
“The argument that European equities appear attractive is because current multiples are in line with historic average. What’s interesting is return on equity is still very depressed and in contrast to U.S. equities. Those earnings and returns are going to recover,” Hemmant said.
Hemmant advocated for investing in the domestic theme of European market rather than focussing on companies garnering revenues from U.S. and China due to concerns over the U.S. recovery and hard landing in China
"Domestic end of the market is where value is concentrated,” he said advising, three-five year view on stock.
“The biggest concern is the sudden surge in enthusiasm for European recovery pace. We do like banking sectors with lots of visibility in earning recovery and provisioning levels coming down. And that is independent of the positive view of European recovery might happen.”
High Yield Investing
Short-term high yield bonds make the right proposition as they are generally insulated from the adverse impact of rising rates, advocated Todd Youngberg, head of high yield at Aviva Investors.
“High yields bonds have supported well in a GDP growth (gross domestic product) environment of 1.5-3.5%. While valuations are probably stretched, defaults are well below their long-term average and interest coverage ratio has improved. There is recovery in the US and Europe is intact. Corporate fundamentals continue to improve.”
Though he has a modest underweight view on high yield bonds, he believes the shorter end of high yield bonds with duration up to three years and maturity up to five years can be an appropriate solution.
High yield bonds can still provide some buffer in a normalising environment, said Jonathan M Liang, vice-president and senior portfolio manager – fixed income, AllianceBernstein.
“The European high yield issuer looks quite interesting compared to the US high yield market. We have been adding European high yield exposure since the last two years, with 20% of the portfolio allocation.”
In emerging markets, he prefers corporate bonds to sovereign debt.
“In the last four years, we shifted from EM to US corporate high yield. But that situation has now reversed. But, we would rather go slow on investments in EM in the global yield portfolio.”
