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EM growth stocks behaving like value ones, says AAA-rated manager

EM growth stocks behaving like value ones, says AAA-rated manager

Certain growth stocks have de-rated as if they were value stocks and now provide good opportunities for investors in emerging markets, according to Citywire AAA-rated James Syme.

Syme, who co-runs the JOHCM Global Emerging Markets Opportunities fund with Citywire AAA-rated Paul Wimborne, wrote in an investor update that emerging world growth stocks continued to outperform value stocks due to economic factors and the drop in commodity prices.

‘The slowdown in growth in emerging markets has caused investors to pay a greater premium for companies with strong and secure growth prospects, and, as our process recognises, stocks in markets with weaker macroeconomic and political environments tend to be cheaper and have also struggled in the last three years,’ Syme said.

‘Rather than sit at one of the growth or value extremes, our process looks for companies with good growth prospects but also with attractive valuations. Nevertheless, we believe that the portfolio has some large positions that have de-rated as if they were value stocks, and we see particularly strong potential for performance from these positions.’

The largest holding in the fund is electronics producer Samsung (8.4%), which, Syme highlighted, is currently developing foldable displays and the next generation of semiconductors, as well as working with other manufacturers on new technology. 

‘The company trades at a significant discount to book value and has a free cash flow yield of nearly 10%. By any metric, Samsung Electronics is a value stock, and yet from an operational viewpoint it does not resemble the state-owned banks and commodity businesses that are more typical in the value universe.'

‘Corporate restructuring continues and, from both an operational and a financial standpoint, Samsung Electronics remains a high-conviction holding,’ Syme said.

Chinese consumers

China is the largest country allocation in the fund at 29.8% and retail sales in the country are growing at 11% despite concerns about the economic slowdown. Syme is keen to play the consumer theme, as he thinks demand will grow and some stocks are undervalued.

‘Two names in the portfolio which we are particularly positive on are Hengan International and Alibaba. Hengan is the largest local operator in the infant nappy and sanitary product space, is a clear beneficiary of lower commodity costs and, at 18x 2016 forecast price/earnings ratio, trades at a significant discount to other emerging market consumer staples businesses.’

‘Alibaba is the dominant Chinese e-commerce company and reported year-on-year revenue growth of 32% in the last quarter of 2015, yet the stock has de-rated aggressively to 24x 2016 forecast price/earnings ratio, a very significant discount to both local peer Tencent and global peer Amazon,’ he said.

The JOHCM GEM Opportunities fund lost 18.2% in US dollars over the three years to the end of January 2016. This compares to a fall of 24.4% by its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD, over the same period.

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