Invesco Perpetual’s head of emerging market equities Dean Newman has said he has yet to see firm signs of a market bottom for the asset class, despite the bounce seen in recent weeks.
The MSCI Emerging Markets index has risen 15 per cent from its January 2016 lows, and even outperformed many developed markets on the downside at the start of the year. But Mr Newman said revisions to corporate earnings metrics – which show whether sell-side analysts are increasing or decreasing their expectations – were still negative.
Mr Newman said a shift to neutral or even positive revisions was the missing piece of the puzzle for emerging markets.
This, he said, would be a “key indicator of when one should be more positive” on the asset class.
“Should the revisions ratio improve and stabilise, or move to closer to positive territory, it is a very strong signal. It says valuations are cheap and you can believe in the valuations.”
Mr Newman said his “gut” told him that downward corporate earnings revisions, particularly in Latin America and emerging Europe, would continue in the short term.
However, he added: “We are in the territory where we are close to the bottom.”
The fund manager said that two headwinds to have plagued emerging markets in recent years – dollar strength and commodities weakness – were now petering out.
“Recently markets have rallied and a number of commodity prices have rallied and we have to take those signals seriously,” he said.
He summarised: “I would concur that economic growth is continuing to weaken, which does somewhat undermine the case. The more evidence we have the recovery in the US is stable and on an upward trajectory, and the corporate earnings revisions stabilise, then those would be another two good signs that emerging markets are turning a corner.”
The manager’s £230m Invesco Perpetual Global Emerging Markets fund has been underperforming the MSCI Emerging Markets index thus far in 2016, with the manager putting the blame on stock selection.
Mr Newman said the sharp slump and rebound this year had not served his stocks well. The manager suggested his holdings had been left behind by market rallies but were also not as defensive as the likes of consumer staples, which tend to perform better in down markets.
“On balance, the stocks in our portfolio trade on a similar or cheaper valuation to those in the MSCI index but have a higher outlook for earnings growth and return of equity. That is an appropriate blend of a strong valuation discipline and looking at fundamentals,” he explained.
The cheapest valuations, he said, were to be found in Russia, South Africa and Turkey. By contrast, China, Hong Kong, Malaysia and South Korea were home to an abundance of fairly valued or over-valued entities.
While he waits for markets to bottom out, the manager said he had structured the fund in a way he hoped would minimise the damage caused by equities’ gyrations.