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Some of the biggest names in emerging markets may be yesterday’s success stories, at least as far as JO Hambro Capital Management is concerned.
Just look at the numbers: The MSCI Emerging Markets Index jumped more than 45 percent in the two years prior to this one. That means Alibaba and tech peers such as Tencent and Baidu, which make up a big portion of the index, are no longer attractive, said James Syme, a developing nation specialist who helps oversee London-based Hambro’s $40 billion of investments.
"It’s names like that that make the asset class look expensive," Syme said in an interview in New York.
Pockets of opportunity remain in places such as South Korea, where political pressure will push corporate governance changes, and Taiwan, where financial companies will benefit from rising yields, he said.
Still, higher valuations and the likelihood of a series of Federal Reserve rate hikes means buyers should be picky. Other worries include the inability of governments in places such as Brazil, South Africa and Mexico to come through on promises to make market-friendly changes to fiscal policy, he said. Commodity prices are yet another headwind.
Here’s more on what Syme’s watching in emerging markets:
"I can’t think of what you’d want to own in Mexico under an AMLO administration," he said, referring to leftist presidential candidate Andres Manuel Lopez Obrador While Mexico has attractive valuation relative to history and reasonably devalued currency, AMLO election is substantial risk to equities, bonds and currency
Sees potential, but cautious of fiscal deficit Election years are often negative for Brazilian equities "It’s hard to see an immediate market-friendly result from the election"
Doesn’t own any Turkish assets and sees it as the country with "the most potential for downside in US dollar terms in 2018" Predicts inflation will keep rising "Being in EM when the credit boom rolls over tends to be difficult, particularly in a domestic and financials-heavy market"
"Very skeptical" about economy and potential for new government to implement changes to the economy "While the Ramaphosa transition is good news for South Africans, it’s hard to see what can immediately be done to turn the economy around" Only holds media company Naspers
South Korean companies look more likely to follow Japan’s corporate governance overhaul after long paying out far less in dividends than their peers "There’s still a lot of unreformed cheap companies in South Korea"
Rising yields, usually headwind for EM equities, benefit Taiwanese banks Insurers react to higher yields in investment portfolios Banks are dependent on interest income, rather than fee income, and rising yields let them open up spreads
China remains a "significant opportunity" Favors consumer staples, utilities Monetary tightening will contribute to economic slowdown and decrease commodity prices Sees signs of a credit boom in groups like HNA, Angang and Wanda
Stocks have potential for significant rally As presidential elections approach, the relatively closed-off country could experience a credit boom Invests in cyclical names across India’s bank, auto and consumer and industrial sectors "The Indian economy resembles a coiled spring waiting to be released"
Sees value in Poland, Hungary and Czech Republic, despite thin markets Economies are recovering after deleveraging phase The Phillips Curve, the theory that decreased unemployment will lead to higher inflation, has re-emerged in Czech Republic:"The idea that the Phillips Curve is dead is not something you’d find in Prague"