Strong month for emerging equities in January

Investors were encouraged by solid data coming out of the US, Germany and China, a pick-up in mergers and acquisitions and the introduction of the long-term refinancing operation in Europe, which reduces the risk of a serious deterioration in the continent in the short term.

Whatever the news, however, we remain focused on searching for undervalued sources of growth in the stockmarkets. We are overweight China, attracted by valuations in its stockmarket, which trades at a multi-year low of 8.3 times 2012 earnings, with a historic return on equity of 17 per cent. China continues to benefit from still high economic growth and the effects of its recent easing of monetary policy. The market overly punished Chinese equities due to the risk of a hard economic landing in the country and concerns regarding persistent inflation. Inflation has already begun to fall to below 5 per cent on an annual basis, while GDP growth for 2012 is expected to be above 8 per cent.

Our exposure in China is focused on a mix of domestic-orientated stocks in the financial sector, consumer sector and materials sector. We expect to benefit from loans growing and lenders expanding their interest margins, demand from consumers for services that have underpenetrated their range of potential markets and demand for social housing – the latter through shares in real estate developers and producers of cement for construction.

Our overweight position in Korea is predicated mostly on the impact of its undervalued currency on the export sector. As a result, we favour the leading IT companies, such as Samsung Electronics, which benefits from the demand in smart phones and growing penetration of dynamic random access memory in IT systems. We also favour the industrial segment, namely Hyundai Heavy Industries, given its leading edge and growth in its complex shipbuilding business.

We also find the Brazilian equity market attractively priced. In our opinion, the financial and energy sectors are highly attractive. The financial sector has solid growth prospects, limited capitalisation issues, pays high dividends and is trading at multi-year low valuations given the outlook for profitability.

We have a neutral positioning in the Indian market based on our higher than consensus expectations for exporters in the IT and consumer discretionary sector. Valuations are also supportive. From a country point of view, we are less positive due to the government’s constrained fiscal accounts and lack of monetary policy flexibility.

Although the Russian equity market is attractively valued, aversion to risk and the impact of political risk in the country has resulted in a small active positioning.

We remain underweight in Taiwan given the overall low-growth prospects for the broad market.

The two other large countries in our universe are Mexico and South Africa. In both cases we are underweight. Mexico’s equity market is fully valued, as it trades at 18.7 times its earnings, while overall returns on equity are falling. We have a preference for the pan-regional Mexican companies such as América Móvil, the largest telecoms operator in Latin America. South Africa, on the other hand, is fully valued with a lack of attractive earnings growth stocks. Here as well we have a preference for stocks which are delivering on the back of their pan-regional or international corporate strategy – firms such as Naspers and Sasol.