Paul McNamara on Local Emerging Market Debt
I think the outlook for emerging markets (EM) is pretty good. Although it’s been a tough year so far, we’ve seen valuations improve a lot, we’ve got higher rates, cheaper currencies and cheaper bonds across the board. There have been a couple of problems, especially in Turkey and Argentina, but there’s a lot of other markets which have strong external balances and a good growth outlook. EMs in particular tend to be a good way of accessing an improving local growth picture and, despite some pessimism across the board, we do think that EMs are well set for the year ahead.
Ernst Glanzmann on Japanese equity
Imagine over the last 10 years, earnings in Japan have grown at a speed of 9%pa; compare that to the US and this is double the speed. Another thing that is very remarkable is the fact that US companies’ trailing earnings per share is at 21x while Japan’s is at 13x and it is at historically low levels. So you have superior growth at very low PE multiples, while in the US you have good growth at very high multiples. Going forward, we expect earnings to grow at the speed of around 8%pa, so a similar growth pattern, again with low valuations. So from my point of view, it is clear where I would put my money.
Hans Ulrich Jost on European Equity Value
Looking back at the last 12 years, we had the biggest ever continuous underperformance of value versus growth in the Eurozone to the extent of about 85% and the funny thing is that since 2015, the economic recovery was going the opposite way. And actually it’s been events like Trump, Turkey and all of the geopolitical stuff that has been worrying the market, which has continued to depress the bund yield, which has become the ultimate proxy of value performance. And what’s even more surprising is that the weaker segment, ie the banks, that have been underperforming most 10 out of the last 11 quarters, they have had the strongest positive earnings revision ratios so that is telling in itself. In the meantime, when we look at the banks we get between. 0.3x and 0.8x tangible book, most of them pay 5-6% dividend yield, they are all growing their earnings in the teens; were they to belong in the growth camp their multiples would not be 5-8x earnings, but 20x plus. But eventually we know history always repeats itself and that normalisation will come.
The main reason why this is being held back is because of the large amount of money being allocated to the strategy in the last 3-4 years has been to ‘the machine’. 92% of volume these days is being driven by ‘the machine’ and all these machines are programmed according to momentum signals – so what goes down must be bad and what goes up must be good! This is what ‘the machine’ basically does – it always knows the price of everything, but not the value of anything and that’s the difficult thing in this environment.
We have seen another collapse in the value stocks during July and again in August; what’s even more fascinating is when we had the ‘low’ in value in February 2016 – when all the commodities had troughed and all the yield curves went into negative territory – value has now managed to underperform the growth half of the market by another 750bps, even though for two and a half years (on top of an economic recovery) of continuous earnings upgrades, more retained equity for the banks – but that’s what the market is making out of it short-term. It’s a multi decade opportunity what we’re looking at.
Scilla Huang Sun on Luxury Brands
We remain quite constructive for the luxury industry. Luxury companies have reported very robust results year-to-date: we have had positive surprises coming out of Asia, but also the US; and, interestingly, companies have seen no slowdown of Chinese consumption which was one of investors’ biggest fears. I think investing in luxury brands means you get exposure to the growing middle class in emerging markets; you get exposure to growing wealth creation globally, but by investing in well-financed western companies, that have a very strong brand, pricing power and high margins.
Tim Love on Emerging Market Equity
Emerging market (EM) equities have had a torrid year after a spectacular January and a spectacular 2017. But the question obviously arises after a 20% fall in US dollar terms – is this the time to buy or is this the beginning of a contagion that is going to continue in a downward spiral. We’re in the former camp. We believe that actually it’s the time to be adding judiciously to various parts of the EM complex. Why so? Well, the question in my mind is the reverse, why haven’t EM already fallen 75% in US dollar terms as they did in the Asian crisis or indeed in other periods where the US was entering a steeper yield curve with a stronger dollar? And the answer is this time around, 20% is the figure we have fallen, not 70+% and the answer is that we have nine of the top ten EM at investment grade; we are much more resilient. The US dollar up and commodities down argument of the past has less impact because it’s only 12% of the index rather than 48% previously. Secondly, the problem countries - the so-called Fragile Five – or the more obvious examples in the headlines Turkey, Venezuela and Argentina are in aggregate less than 0.5% of the index in which we invest, so the transmission effect is lower.
Nonetheless, why haven’t we fallen more? Because we are very attractive on secular and cyclical arguments: we appeal to many people in the investment world – value, growth and yield; not only those looking for yield in investment grade, but those looking for currency uplift on the positive carry; or on the crossover – those from other asset classes coming into EM; or those within equities looking at a risk/return quadrant saying actually at this juncture EM has very little downside on a PER of around 11 or earnings at 15% and ROE of 14% and therefore, relatively with downside being more limited and upside materially more developed, it’s a wonderful risk/return entrance point.