Too many emerging market investors are relying on ‘simple and unscientific’ PE metrics to value developing stocks when the sector is much more nuanced, Citywire AAA-rated Geoffrey Wong has said.
Wong, who co-runs the $1.3 billion UBS Global Emerging Markets Opportunity fund, said that many investors had fallen into a trap by using price-to-earnings as a sole gauge of a company’s worth.
‘There are many managers who identify as value simply because they buy low PE stocks but that is not a differentiator between a science and what used to work. It used to be simple that you would buy a low PE stock and wait for it to rise but it is no longer that easy.
‘We have had different types of stock come to the fore, so how would you judge an EM tech stock on a valuation basis, for example? If you look at the network effects of certain companies, they have got excellent growth at high multiples from the outset, so someone identifying as value is basically missing a big chunk of useful companies.’
Wong said PE analysis is essentially a ‘short cut’ which overlooks key fundamental work to accurately measure a firm’s growth potential. ‘It can create a blind spot for some investors, as they instantly overlook new things because they are using old shortcuts.’
Transition made possible
The Singapore-based fund manager said EMs as a whole are in the foothills of a strong recovery after a five-to-seven year period of underperformance. This saw Wong and his team transition the giant fund to capture opportunities away from defensive stocks, which are viewed as expensive.
‘We starting turning the portfolio in 2015 and added some iron ore and steel companies. We went underweight defensives and sold down our healthcare and telecoms exposure, while adding to areas such as consumer cyclicals and IT, where we are now overweight.
‘We are just at the early stage of the cycle and that is why we want to be in cyclical areas because we are conscious we are in a recovery stage. Companies are still expensive in defensive areas, so we can also look at cyclical sub-sectors, such as autos and retailers, as well as consumer stocks and ecommerce for growth.’
Financial services currently account for 30% of exposure, while consumer discretionary stocks make up 15.2% of investment at present. This is while the largest single investment is a 7.15% allocation to Korean electronics giant Samsung.
The UBS Global Emerging Markets Opportunity fund returned 24.6% in US dollar terms over the three years to the end of July 2017. This compares to an 8.5% rise by the MSCI EM (Emerging Markets) TR USD over the same time frame.