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Staying the course and being selective reaps long-term rewards in EM

Staying the course and being selective reaps long-term rewards in EM

08-04-2020 | Insight
Emerging markets equity strategies with their value tilt should typically underperform in risk-off markets. However, over the many years that our team has been in place, we have learnt to use market over-reaction to find opportunities.
  • Fabiana Fedeli
    Fabiana
    Fedeli
    Global Head of Fundamental Equities
  • Jan de Bruijn
    Jan
    de Bruijn
    Client Portfolio Manager

Speed read

  • March 2020 sell-off worse than August 2015 but better than October 2008
  • We have seen this before: this is where we find the best opportunities
  • In last 20 years, our strategies outperformed after extreme sell-offs

Over the last 20 years, our emerging market strategies have often generated positive relative returns following periods of extreme risk-off, outperforming the index over the investment cycle. We continue to adhere to our investment process, gradually changing our positioning wherever superior risk-reward prospects emerge.

The most common mistake that value investors make in economic downturns is to get into value traps, i.e. companies that will either take longer to recover or will never recover. Balance sheet strength and earnings outlooks remain key.

Robeco’s emerging markets equity strategies are well positioned to benefit when the market recovers. In a rebound, the tide will lift all boats, but once the impact of the crisis on earnings becomes clear, we will be able to distinguish winners from losers. Our investment process is inherently designed to unearth those stocks for which we believe the market is mispricing the future earnings potential.

Our track record shows that this type of portfolio tends to outperform when the market recovers after a crisis. The economic cycle will differ a lot from region to region, since North Asia went into the economic slump earlier than the rest of the world. China, Taiwan and South Korea have for now tackled the virus and are gradually recovering. It is really a first in-first out phenomenon that could result in large discrepancies between countries’ economic and financial performances.

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