InvestmentsMay 14 2013

Quality EM stocks ‘are in short supply’

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ByMatthew Jeynes

Emerging markets managers are struggling to find opportunities in high-quality defensive sectors that have been overbought even more so than in the developed world.

Emerging market indices have lagged global markets for more than two years but the gap between those stocks considered high quality, such as consumer staples, and those thought of as low quality, such as materials, has widened significantly.

“The divergence between valuations in higher quality stocks and those in lower quality stocks is even more dramatic in the emerging markets,” said Alistair Way, manager of the £78.8m Standard Life Investments Global Emerging Markets Equity fund.

“There are consumer staples stocks trading on valuations of more than 30 times earnings – that is not untypical right now – but there are some oil names that are on low single digits, though these are generally state-owned and there are some reasons for the low multiples.”

Jonathan Asante, co-manager of the £4.1bn First State Global Emerging Markets Leaders fund, said he was struggling to find any companies that fit his quality criteria.

The fund has a bias towards consumer staples stocks but Mr Asante said many of those were now fully valued and he was not able to find good opportunities elsewhere.

“Our cash levels are slightly too high and we are trying to buy stocks but it is easier to sell stocks than buy them right now,” he said.

However, the manager has invested 2 per cent of his fund in energy stocks Tullow Oil and Oil Search because the unpopularity of the sector had led him to consider opportunities in this area.

He also said there were attractive opportunities among emerging market banks, which he said were much more straightforward and focused on domestic lending.

Mr Way said he was not constrained by having to look for pure high-quality stocks and that he was finding many opportunities outside of overpriced consumer staples.

He has been buying into Chinese banks recently because he thought the fears over the credit quality and solvency of the system have been overplayed and have reduced the banks to attractive valuations.

He has bought into Bank of China, ICBC and China Construction Bank to bring his China weighting up to 5.5 per cent of the fund, an overweight position relative to the index weighting of 4.5 per cent.

Omar Negyal, co-manager of the £56.7m JPMorgan Emerging Markets Income fund, said he was focusing more on consumer discretionary stocks rather than consumer staples because “cyclical stocks are cheap compared to history”.

However, he said that he still had a neutral position in consumer staples and was prepared to pay a bit extra for quality stocks.