Emerging market stocks are so cheap, “there is blood on the streets”, so says Carlos Hardenberg, co-founder of Mobius Capital Partners.
In a few years’ time, investors will look back on today as “a very unique time to get exposure to these vibrant economies and underlying companies” at multi-year low valuations, Hardenberg adds.
Trade tariffs, a rising US dollar, and strengthening commodity prices, have caused many emerging stock markets – including Hong Kong’s Hang Seng index – to fall into bear market territory.
This has created what Hardenberg believes is “a unique entry opportunity” in many emerging market assets, including currencies and equities.
The former Templeton Emerging Market Investment Trust (TEM) manager notes that, faced with headwinds, currency markets tend to “over-react”.
The JPMorgan Emerging Markets FX Index has fallen almost 14% year-to-date. The Turkish lira has fallen 92% over the past 10 years, with the Brazilian real down 65% and Mexican peso down 41%.
But this severe fall is not backed up by the fundamental macro drivers, Hardenberg argues. In the past, emerging market countries generally ran huge deficits, had fiscal problems, a tonne of foreign currency debt and no FX reserves.
Today, 90% of emerging economies have a current account deficit that is less than 1%, and they have accumulated their largest ever stock of foreign currency reserves, “so they are very well prepared to deal with this volatility”, says Hardenberg.
Valuations at 12-Year Lows
At the same time, emerging market book values and price-earnings ratios are at 12-year lows. Asian technology stocks, for example, are now trading at a 60% discount to their US counterparts. “There is a huge degree of pessimism baked into prices,” Hardenberg explains.
“We think it’s a good time to look at quality names, companies which have strong management, companies which have a vision to grow, and which have shown the ability to constantly innovate.”
Hardenberg was speaking at the launch of Mobius Investment Trust, a high-conviction portfolio made up of 20-30 small and mid-cap emerging and frontier market names with an ESG tilt. The fund, which is open for investors to apply for shares until 25 September and will be admitted to the London Stock Exchange on 1 October, will be run by Hardenberg and his former TEMIT colleagues Mark Mobius and Greg Konieczny.
Hardenberg notes that when the team, which also includes former Neptune India fund manager Kunal Desai, began building its model portfolio, it saw some “quite interesting valuations”.
“Now, only six months later, they are trading on half. There’s just such an enormous amount of pessimism in the prices right now.
“A lot of foreigners have sold, ETF flows have put a lot of pressure on these share prices, locals have reduced, pensions funds have sold out. We’re buying extremely attractively valued companies.”
NAFTA Will Be Positive for Mexico
Mexico, in particular, is a “very good example of how the market is always over-emotionalised and sometimes irrational”, continues Hardenberg.
When Trump started talking on the campaign trail two years ago about building a wall between Mexico and the US, a “mountain of pessimism” started building into Mexican assets. The market worried about the end of free trade between the two neighbours and that US firms would be forced to sell their assets and factories in Mexico and re-locate elsewhere.
But, says Hardenberg, “this was almost accepted as a fact and it was all complete rubbish”. Instead, the Mexican and American part of the North American Free Trade Agreement (NAFTA) has been re-negotiated and Hardenberg sees this as “very helpful” for Mexico.
The areas that have been badged as being preferential to the States are “no big deal; no game-changer” for Mexico. Instead, the new deal gives the country peace of mind and another decade or two to plan their business on.
“Suddenly the market is realising, ‘hey, the currency is down 45% since they started this, the Mexican market has gone nowhere – is that fundamentally justifiable? Maybe not’. That’s why the Mexican market is beginning to turn around right now.”
US-China Trade Will Pick Up
On China, which is currently at the heart of trade tensions with the US, Mobius sees more short-term pain, with Trump almost certain to implement additional tariffs as China’s President Xi Jinping does not want to be seen as weak.
However, the renowned money manager does think the pair of countries will eventually get round the negotiating table. And he reckons their opposing styles will gel: “The Chinese are long-term thinkers and the Americans are short-term thinkers… this will work really well when they sit down and negotiate.”
Mobius adds that world trade will not shrink. Instead, “it will continue to grow”. And there will be winners, as well as losers. He notes that a lot of the production China has lost has moved into other emerging countries, such as Vietnam and Bangladesh.
“In addition, the Chinese are moving more towards high-tech kinds of production and production that serves the domestic market, rather than the export market.
“So, these changes are going to have a lot of winners as well as losers. We need to challenge ourselves to find the winners in this game of change.”
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