In a world where investment yields have shrunk, global emerging markets equities appear to stand out as a compelling valuation opportunity with Price to Book ratios approaching levels last experienced during the financial crisis.

 

P/B metrics however only provides part of the story. Return on Equity and Return on Capital measures indicate that these companies’ books of assets are now being less productively utilised.

 

Clearly natural resource rich nations such as Russia and Brazil have faced specific challenges over recent times as commodity prices have plunged. Outside of these cyclical businesses is the valuation opportunity so compelling? Defining which businesses are cyclical and which are sensible and sustainable is problematic. So rather than looking at market aggregates, perhaps it is more instructive to monitor the valuations of portfolios run by experts in the region. Aberdeen and First State Stewart (now Stewart Investors) have both built impressive franchises in the region. In a word, Aberdeen focus on ‘sensible’ companies and Stewart Investors focus on ‘sustainable’ companies. Valuations of both these portfolios suggest that opportunities in the region are not as enticing as the headline numbers suggest.

 

First State Global Emerging Markets Leaders fund portfolio valuation

 

Source: Stewart Investors