Lazard’s Pat Ryan has been adding to his already high weighting in emerging market equities as the sector begins to show signs of recovery.
Emerging market equities have underperformed developed markets for several years, but entered a sharp rally in mid-March.
Mr Ryan, who manages the £329.1m Lazard Global Equity Income fund, said the rally had taken place due to a “rotation away from growth-focused developed market stocks and into value emerging market stocks”.
The rally in emerging markets has coincided with sharp share price falls for high-growth developed market sectors such as social media stocks and biotechnology. In the month to April 15 the MSCI Emerging Markets Index rose by 7.4 per cent, while the Nasdaq Biotechnology Index fell by 15.6 per cent.
Mr Ryan said it was impossible to know for certain what triggered the rotation but speculated that the “hawkish” tone of US Federal Reserve chair Janet Yellen’s speech on March 19 may have been interpreted to mean that “rate rises could happen sooner than anticipated”.
While in 2013 stock markets reacted negatively to any suggestion that interest rates may rise, Mr Ryan said that “this time people seemed to be taking the comments very differently”, with investors buying into economically sensitive stocks that had become cheap.
Mr Ryan already had a 22 per cent weighting to emerging markets in his fund before the rally, and said he had been adding to it since the rotation started, anticipating that it could last for some time.
He reasoned that at a price-to-earnings (p/e) multiple of 12 times, the emerging markets index was still trading at a significant discount to developed markets, which are on a p/e of roughly 18 times.
The manager compared the difference in valuation to the trough of the financial crisis and said it had thrown up many valuation opportunities.
He said: “I have been focusing on high-quality businesses that would not be in our valuation range normally, but because sentiment is so negative they are in our range.”
Mr Ryan has been buying into a range of emerging market stocks, from Brazilian consumer companies to Chinese banks. He argued that, as banks are generally sensitive to economic growth, emerging market banks should not be trading as cheaply as they are.
To fund the move into emerging markets, Mr Ryan said he had been trimming some positions in the US and Europe, particularly European insurance companies which had re-rated in the past year.
From launch in October 2007 to April 14 2014, the Lazard Global Equity Income fund has gained 33.4 per cent, ranking in the third quartile of the IMA Global Equity Income sector, according to FE Analytics. In the same period the benchmark MSCI AC World index rose 38.6 per cent.
A turnaround for emerging markets
Following 22 straight weeks of outflows from emerging market equity funds, the end of March saw investors begin to reverse their bearish positions and put money back into the asset class.
Lazard manager Pat Ryan (pictured) said the scale of outflows meant 1 per cent of all of the assets held in emerging market equities were withdrawn in the year to the end of February 2014.
He claimed the “rubber band had been stretched so far” that the situation was inevitably going to snap around the other way.
The most intense period of outflows came in the first two months of this year as a slowdown in China and geopolitical fears concerning Ukraine and Russia weighed on sentiment.
However, fund flow data from asset management firm Aberdeen indicates that outflows may be lessening. In a trading update recently, the firm – which is best known for its outperforming giant emerging markets funds – said it had suffered outflows of £3.9bn in January and February this year. But outflows had dropped to only £0.2bn in March, the company said, leading its chief executive Martin Gilbert to declare that “the worst is over”.
