Stock-picking most effective in ex-Asian markets
The prospects for ex-Asian emerging markets will remain uncertain in 2016 in the absence of any obvious catalysts that will trigger a rebound over a weak 2015. But their performance is expected to improve over a low base, with Central and Eastern Europe expected to outperform Latin America.
“It is very important to realize that all markets are different and do not move in the same direction at the same time, although there will be some events which affect all markets in the short term,” cautions Mark Mobius, Singapore-based, executive chairman of the Templeton Emerging Markets Group.
Among the factors which will weigh on market performance to varying degrees are continued low commodity prices, weak consumer demand, high debt levels, political tensions and arise in US interest rates.
“The picture is not very optimistic for Latin America and Eastern Europe but year-over-year growth is expected look better,” says Matthew Strauss, global strategist and portfolio manager with CI Investments Inc. in Toronto.
Incidentally, two of the largest ex-Asian markets, Russia and Brazil, are both in a recessionand are also experiencing political problems. In the case of Russia, ongoing political tensions with Ukraine and associated sanctions remain an overhang while fresh tensions with Turkey have the potential to escalate in 2016. However, Strauss contends that though Russia is challenging from a political perspective, it will do much better this year following its deep recession, a slowly recovering consumer, and a turnaround for banks. As well, Christine Tan, senior portfolio manager with Excel Investment Counsel Inc. in Mississauga expects Russian inflation will fall next year, resulting in a cut in interest rates.
In Brazil, on the other hand, President Dilma Rousseff survived a late 2015 impeachment threat but will continue to struggle to survive splits in her ruling coalition and fend off efforts to unseat her – casting a pall over the country’s economic future. Brazil is facing a perfect storm of economic headwinds, exacerbated by a hiatus in political decision-making, a standstill in infrastructure spending, a weak fiscal balance sheet and a fair amount of consumer debt, says Tan.
However, she suggests that with valuations at very low levels “you do not need to see much of an improvement to realize an inflow of capital” which could spur an increase in stock prices – although she cautions that “the earnings picture is unpredictable.” But Strauss suggests that “it is hard to see where any upside trigger will come from.”
Low oil prices will continue to benefit net oil importing countries like Turkey, Peru, Chile and the Eastern European region but hurt exporting countries such as Russia, Colombia and to a lesser extent, Brazil and Mexico. Similarly, low base metal prices will hurt exporting nations, especially those in Latin America, such as Colombia and Chile. Strauss does not see any signs of a rebound in commodity prices in 2016.
While managers are shying away from oil and commodity stocks, Mobius believes there is a great deal of value to be found in them.
Turkey, once one of the favored countries in Eastern Europe will be challenging in 2016. “Over the past year and a half its President has solidified his hold on the government and become more autocratic,” says Tan. It has “the potential of an interesting story but its attractiveness will depend on reform decisions, says Strauss. In addition, he says it is experiencing high inflation which is not expected to come down. Plus, says Tan it is vulnerable to the rise in US interest rates because of its high current account deficit.
However, the 25 basis points increase in rates by the US Fed on December 15 and its “dovish stance is viewed as a positive for emerging markets, as a modest uptick in rates allows governments and companies that have borrowed in dollars over the past few years to adjust steadily, whereas a more hawkish rhetoric would have been deemed more detrimental,” says Tan. Mobius adds that an increase of up to 50 basis points “has already been discounted in the market.”
In the wake of a challenging 2016, Mobius believes the factors driving volatility are temporary and remains optimistic over the longer term. He will be looking for investments that have been unfairly punished by the market downturn and are undervalued relative to their true potential. In addition to commodity stocks, he also sees opportunity in hardware and software technology firms.
Tan says ex-Asian “equities are relatively inexpensive and represent interesting value.” However, managers are taking a stock picking approach to investing on a country by country basis.
Latin America
Strauss says “Mexico is the only country in Latin America with good potential from an investment perspective.” Although it is dependent on oil, it will benefit from its linkage to a strong US economy. Tan is underweight in Mexico and says that while it has good opportunities “valuations are not cheap.” She owns Gruma, S.A.B. de C.V., a multinational corn flour and tortillas manufacturing company which produces a staple.
In Mexico, Strauss likes the leading airport developer and operator GrupoAeroportuario Centro Norte, S.A.B. de C.V. which is experiencing a significant growth in traffic but expressed concerns that its valuation is becoming too high. He is also invested in El Puerto de Liverpool S.A.B. de C.V.,the mid-to-high end retailer which operates the largest chain of department stores in Mexico;and the retail giant Wal-Mart de Mexico, S.A. de C.V. which he forecasts will both benefit from a rebound in consumer spending as a result of a pick- up in economic growth.
In Peru, Strauss likes Credicorp Ltd., the country’s largest financial holding company, which he says is highly profitable and whose valuations are interesting based on historical levels. He is however concerned about the impact of potential devaluation of the currency on the company’s balance sheet as the Central Bank pushes to dollarize the Peruvian peso. He contends that El Nino could have a negative impact on the country’s fishing industry.
Eastern Europe
Strauss is invested in Komerčníbanka, a major bank in the Czech Republic which he says is experiencing “decent growth” in a non-deflationary environment.
Tan says a lot of banks in Eastern Europe “are still working through the credit cycle” and “she will be looking to add to her relatively underweight positions.” She is invested in the Polish “cash and carry retailer” EurocashS.A. which she says is trading at an all-time high.
Strauss says “political decisions in Russia can go either way” so he has no exposure to the country. However, Tan likes selected companies such as Sberbank, Russia’s largest bank and such as Magnit PJSC which is the largest retailer.
In Turkey, she is invested in HacıÖmerSabancı Holding A.Ş, the largest industrial and financial conglomerate, which is a profitable company.
(A version of this story first appeared in Investment Executive)
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