Investors are yet to “fully take advantage” of the opportunities emerging market equities can bring to portfolios, according to Eastspring Investments portfolio manager, Navin Hingorani.
Hingorani outlined that the two criteria investors need to generate alpha are cheap valuations and “unloved” companies.
“The starting point for emerging markets in terms of valuations and in terms of positioning is really compelling,” he said. “Emerging markets are currently cheap, trading at a 65 per cent discount to the US, and investor positioning towards the emerging market is almost in a trough.”
Speaking to InvestorDaily, Hingorani acknowledged that sentiment towards emerging markets has remained subdued, with investors overweight the US and underweight emerging markets.
However, he believes that this could shift as the era of US exceptionalism fades.
“From a bottom-up perspective, emerging market companies are showing higher earnings per share (EPS) growth versus developed markets which can lead to outperformance,” he said, adding that relative valuations and stronger growth prospects should encourage reallocation.
He further told InvestorDaily that there are early signs of renewed institutional interest, having observed that search activity for emerging market funds has picked up, alongside a modest lift in allocations this year.
“We are hopeful that the search activity will lead to higher allocations to EM in the near future.”
Historically, emerging markets have outperformed developed markets in environments marked by a falling US dollar, expanding growth differentials, and increasing CAPEX.
“Since the 2000s, 10 of the 11 biggest rallies in emerging market stocks have been during periods of a weakening US dollar. This year, the US dollar has been on a downward trajectory,” Hingorani said.
“We are seeing stable to increasing growth in emerging markets versus declining real GDP growth in developed markets.”
He noted that CAPEX has become a useful signal for an emerging market recovery and after years of decline following the global financial crisis, investment spending has begun to rise again.
Because emerging markets serve as key manufacturers and suppliers to the world, they typically benefit when capital investment expands, a trend that is now starting to re-emerge, according to the portfolio manager.
“When you take all three factors into account, it suggests an environment where you have faster EPS growth in emerging markets,” he said.
Despite global uncertainty wrought by Trump’s tariffs, Hingorani argued that this has created more opportunity.
“In times of uncertainty, the market pays a high price for ‘safer’ investments, but it also tends to overcompensate on the downside by penalising companies where there is a degree of fear,” he said.
“We have a great opportunity to be able to identify stocks that have been mispriced because of this fear around tariffs.”
Regarding tariffs, Hingorani told InvestorDaily that Korea remains vulnerable given its reliance on US exports, but initiatives such as “Korea Value Up” could help structurally rerate the market.
He added that Latin America, which was hit harder than expected by recent tariff announcements, may present opportunities as fundamentals prove “better than feared”.
Moreover, Hingorani stressed the importance of active management in emerging markets, stating that if one invested in the emerging market index over the last five years, returns would have been at the third quartile, opening up more opportunity for outperformance.
“Investors are essentially [accessing a] diverse range of economies, across various continents,” he said.
“The universe of investable stocks is more than 3,000, so active management plays an important role in bringing the essential thesis into specific economies and picking the right stocks with the limited resources that you have.”
Finally, he called on investors to remove bias and avoid investing only in popular names.
“For investors, the biggest determinant of future return is the price that you pay when you go in, and at the moment emerging markets are really compelling because they are trading cheap and the upside outweighs the uncertainties.”
