The bullishness among presenting fund managers was the more remarkable, considering there was not a single emerging markets equity manager in the room. Nearly all Icelandic delegates attending the event said they want to increase their allocation to international equities, including emerging market stocks, if they just were allowed to.
“It’s a very attractive time right now to buy emerging market equities,” said manager of the Janus Europe Fund Wahid Chammas, who kicked off the discussion on the topic. According to Chammas, emerging market companies have a lot of room to increase pay-outs to shareholders. “You find a huge anomaly there in terms of dividend yields and what they are actually giving back in terms of their cash flow.”
Georg Elsaesser of Allianz Global Investors added emerging markets are set to benefit from a sustained recovery in Europe. “I don’t believe in this decoupling story.”
Exposure through Europe?
But to think that emerging markets will simply reproduce the returns European equity markets have shown with a little delay is a bit too simplistic, Chammas warned.
“Emerging market equities are so volatile because of the way they are being traded, with money flowing in and out on the basis of central bank statements,” he said. So the ideal way to access emerging market growth potential is through European equities, Chammas argued. “You can buy a collection of stocks there which give you all the power of value creation in emerging markets without the vulgarities of these market flows.”
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He was joined by his fellow European equity manager from Threadneedle, Francis Ellison. “If you buy Unilever in Europe, you get a 5-6% free cash flow yield. If you buy its subsidiary in India, you pay about 30 times P/E.”
Opportunity investing
Perhaps precisely because of its volatile nature, emerging markets offer some exciting opportunities for momentum investors. Chammas: “The crisis in Ukraine gave me the opportunity to buy Raiffeisen [which has a subsidiary in the country]. You have to stress test them and assess whether they can survive a serious deterioration of the situation on the ground there, but in principle these kind of emergency situations are a great source of alpha.”
Anja Hochberg, chief investment officer of Credit Suisse Asset Management, noted that private bankers often must be hesitant using funds that employ this kind of strategies though.
“Private banking clients will always expect you to explain your portfolio in such a situation. You’ll have to conduct a deep analysis about what could go wrong in the portfolio before you can make such a bet,” she said. “Institutional investors do not have this problem.”
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