Star fund manager Jeremy Lang has begun to reverse his longstanding bearish outlook on emerging market equities as companies adapt to a “tougher” market environment.
The Ardevora manager and his colleague William Pattisson have had a negative view on companies listed in emerging markets since the launch of their Global Equity fund in 2011.
However, Mr Lang said his latest review of the global equity universe had triggered a shift in that view.
The manager said he had started to find a number of companies matching his investment criteria throughout emerging markets, particularly in China.
“One thing I have noticed is that for the first time in a long time there are some interesting ideas coming out of emerging markets,” said Mr Lang.
The bottom-up stockpicking style of the fund means the managers tend not to make big regional calls, but Mr Lang said he would likely start buying more emerging market-based companies.
Such a shift would not, however, mean a “large move” in the portfolio straightaway.
The Ardevora managers’ cautious approach has kept them away from emerging market stocks while company management teams in the region structured their businesses and made investments based on a bullish view of market growth.
Deteriorating economic data and earnings growth in recent years have led to consistent underperformance from emerging market stocks compared to the developed world.
However, Mr Lang thinks emerging market businesses have finally woken up to some harsh realities and restructured their businesses accordingly.
“Companies in emerging markets have had a difficult time for a number of years,” he said.
“So the risk has been washed out and businesses are behaving in a less gung-ho way.
“Because life is much tougher in a number of emerging markets, we like that because it forces management to recognise that life is tougher and they have had to take fewer risks.”
Mr Lang said the negative overreaction in investor perception of emerging markets – in particular, for China – was throwing up value opportunities in the region.
He said China had been hit by a “pervasive negative narrative” around issues such as its shadow banking system and concerns about a property crash.
However, this narrative has swamped all stocks, regardless of whether the companies would be affected by, say, a downturn in the property market, and this “anxiety” has thrown up opportunities, according to Mr Lang.
The Ardevora Global Equity fund currently has a 13 per cent weighting to emerging markets, less than the fund’s benchmark, but Mr Lang said that figure was likely to rise in the coming months.
The fund currently has a barbell approach to emerging market equities. It mainly concentrates on the defensive side of the market, such as utilities and infrastructure, with a smattering of growth names from the technology sector.
Mr Lang said this approach was likely to continue if and when new emerging market stocks were added to the fund.
Is an emerging markets play clear cut?
Jeremy Lang may soon be upping his stake in emerging markets and it seems he is not entirely alone.
The Bank of America Merrill Lynch Fund Manager Survey for August showed that the number of investors moving to an overweight position in emerging markets had moved to an 18-month high.
Lucy Walker, co-manager on the Sarasin fund-of-funds range, has also been adding to emerging markets this year, having ramped up exposure to general emerging markets and country-specific funds.
Ms Walker is not even particularly bullish on equities, describing her overall weighting as neutral, but she sees far more value currently in emerging markets than other regions.
Santander Asset Management multi-manager Toby Vaughan has also recently increased his exposure to emerging markets at the expense of developed market equities.
But Ayesha Akbar, a portfolio manager on the Fidelity Solutions fund of funds, has declared “it is time to take profits on emerging markets”.
Speaking to Investment Adviser last month, Ms Akbar said investors had “seen the best of the emerging market rally”, adding Fidelity had been taking profits on its emerging market holdings.
She warned that the slowdown in China was likely to persist for a long time, as recent data has been “almost uniformly bad”.
Ms Akbar also said many other emerging markets were in dire need of reforms that do not seem to be imminent, even in countries where post-election euphoria had seen stockmarket rallies anticipating changes.
