For Artemis’ Peter Saacke, the disconnect between the attractive valuations of emerging market companies and their earnings is creating momentum.
On the one hand, expensive U.S. equities, while U.S. inflation is rising daily, stand in stark contrast to relatively undervalued emerging-economy equities, especially Chinese equities, on the other. And, while the latter’s central banks implemented restrictive policies in 2021, it predates the restrictive policies of Western central banks anyway, preventing any inflationary drift. Therefore, emerging markets offer a more attractive entry point than other markets. Peter Saacke, a partner at London-based asset manager Artemis, said it would be a shame to miss out on the investment opportunity.
Rising US interest rates may not be enough to guarantee its hegemony.
According to Peter Saacke, four factors have affected the valuations of emerging market companies over the past six months, including South Africa, Brazil, China, Colombia, South Korea, Indonesia and Turkey. The first is geopolitics, which has to do with Russia. Big loser, Russia, big winner in oil supply Middle East, metal in Southeast Asia. The second is that due to the US-China trade war, it is beneficial to “shift” production and supply chains from China (contrary to the historical trend) to the countries of customers so far. Decide to “relocate” a certain number of strategic assets. This movement has led China to abandon industries that depend on labor costs and refocus on higher-quality industries, especially renewable energy. Third: Fed-led rises in interest rates, a factor that has historically affected emerging countries, the weight of their dollar debt has become unbearable. Most of them are now more resistant to rising interest rates – they have learned the lessons of 2013. The dollar is precisely the fourth and final factor: rising U.S. interest rates may not be enough to guarantee its hegemony. The Chinese yuan could use an anti-Russian and anti-ruble backdrop to challenge the dollar standard.
Emerging ‘value’ stocks, the best bulwark against inflation
“These factors have only added to the investor pessimism that has prevailed over the past decade,” Peter Sack said. This pessimism explains why investors are sorely underinvested in an asset class that accounts for 11% of the global equity market’s market capitalization”. Why? The data speaks for itself: Emerging country value companies currently yield 11.4% , while comparable international companies have an average return of 5.7% and U.S. companies have an average return of 5.1%. Which “value” companies offer the most effective inflation protection. Not because they are in expansionary currencies that are very favorable for growth stocks The environment has been severely punished, so they should be undervalued today, and those in emerging countries are even more irrelevant to the threat of inflation.
China is in sight
“In the emerging equities space, Chinese companies are particularly attractive. Today, they are trading at a 50% discount to their US and European currency pairs, which is extremely low valuations in a year and a half,” commented Peter Saacke. Reality and expected results for these companies Far from it, it shows that China has not yet reached its peak.