While it might seem counter-intuitive, the most frustrating time for a fund manager is when investors are in ‘peak exuberance’ mode. The euphoria that was prevalent in December 2017 and early 2018 – when the MSCI emerging markets index registered gains in excess of 8%[1] for the month of January alone is, thankfully, over.
Global risk appetite has fallen to more normal levels. Profit expectations for the emerging market region are not scaling lofty heights. A degree of caution has returned to analysts’ forecasts. This is exactly what investors should prefer. Stock markets peppered with a dollop of healthy scepticism are what fund managers typically favour.
And while short-term noise over the strengthening of the US dollar, and its impact on the emerging market asset class, may make for good media headlines, underlying corporate fundamentals remain strong; in terms of recovering profits, margins and returns on capital.
Nor are valuations excessively demanding. Despite a rally in the asset class, which started in earnest in January 2016, after years of languishing in the doldrums, emerging market equities trade on a price/earnings multiple of 12.5 times estimated 12-month forward earnings, compared to a near 16 times price/earnings multiple for developed markets for the same period.
Our strategy is determined by finding good quality companies but paying less for them than their intrinsic value. That… and having the courage of our own convictions. The share price of Taiwan Semiconductor Manufacturing Company (TSMC) has drifted lower of late, not helped by the perceived weakening in sales of Apple iPhones. But exponential growth in data storage and data processing mean that TSMC has diversified its customer base to cover cryptocurrency mining, artificial intelligence and in the internet of things. Comfortable with our forecasts, and the high return on capital generated by the company, we have taken advantage of share price weakness and added to our holding.
Emerging markets have lost their froth. Volatility has returned. Opportunities for the active fund manager are typically easier to find.
Please remember that past performance is not a guide to future performance. Investment involves risks. The value of investments and the income from them can go down as well as up and investors may not get back any of the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall.
This communication is issued by Old Mutual Global Investors (UK) Limited. Old Mutual Global Investors is the trading name of Old Mutual Global Investors (UK) Limited and Old Mutual Investment Management Limited. Old Mutual Investment Management Limited, Millennium Bridge House, 2 Lambeth Hill, London, England: EC4V 4AJ. Authorised and regulated by the Financial Conduct Authority FRN: 208543 Old Mutual Global Investors (UK) Limited, Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4P 4WR. Authorised and regulated by the Financial Conduct Authority FRN :171847. A member of the IA.
Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Old Mutual Global Investors as a result of using different assumptions and criteria. OMGI 05_18_0011.
[1] Source: Bloomberg in USD, price return terms.
