latamen
The value comeback is driving emerging markets equities too

The value comeback is driving emerging markets equities too

06-07-2021 | Insight
After a decade of lackluster returns, the value stock showdown reached a climax in 2020. Across the globe, value stocks strongly underperformed their growth peers during the Covid-19 market shock and subsequent rebound. Since November 2020, however, value has been making a comeback. In emerging markets, the recovery has been modest so far, but prospects are promising.
  • Jan de Bruijn
    Jan
    de Bruijn
    Client Portfolio Manager Emerging Markets

Speed read

  • Value has been making a comeback in both developed and emerging markets
  • Our fundamental equity strategies have an inherent value tilt
  • We believe the value rally has room to continue in EM, but with a twist

The value versus growth equity story has been one of two halves in the past two decades. This has been the case not only in developed markets – which tend to command the most attention from investors and researchers alike – but also in emerging ones. Emerging markets value stocks performed strongly between 2000 and 2010 before succumbing to the resurgence in growth stocks from 2011 onwards.

During the first wave of Covid-19, global economic growth collapsed while long-term interest rates dropped to extremely low levels. The 10-year US Treasury yields nosedived to an historic low of 0.5% in early August 2020. At that stage, corporate earnings growth had become extremely scarce, and investors flocked to any stock showing minimal signs of growth.

Sectors with a growth angle substantially outperformed the broader market, and in particular more cyclical ones. In emerging markets, Chinese internet stocks were perhaps the most telling example of such an extreme performance gap. Even as global equities markets collapsed, in March 2020, these stocks emerged from the turmoil virtually unscathed, rallying strongly in the recovery that followed.

Climate Series – don’t miss a thing
Climate Series – don’t miss a thing
Subscribe

Vaccine promise triggers a rotation

The progress made on vaccines to fight the pandemic proved to be a turning point for style performance. With the promising results of several vaccine-candidates released in the last quarter of 2020, global economic growth prospects improved, and long-term interest rates rose steeply from depressed levels. For instance, 10-year US Treasury yields rose from 0.5% to 1.7% in the space of just eight months.

At the same time, energy prices and commodity prices generally started to rally as well. As a result, the earnings outlook for companies in the Energy and Materials sectors, as well as in the Financial sector, improved significantly. Corporate earnings growth became less scarce across the board and growth stocks started to underperform their value counterparts.

Many investors interpret this simplistically as a rotation from growth to value. But there’s more to it than that, as value comes in different shades. We have witnessed the initial rotation phase from growth into value. This was a classic start to the reflation trade, with investors buying into cheap laggards, resulting in deep value stocks initially outperforming the broader market.

We believe that further outperformance lies ahead for value, as long as the economic outlook continues to improve

We believe that further outperformance lies ahead for value, as long as the economic outlook continues to improve. However, we expect investors to become increasingly selective in their choice of value stocks. Investors will start to look for stocks that deliver on their perceived value, showing better earnings potential in a normalization of the macroeconomic backdrop.

Therefore, after the first wave of value investing has boosted all cheap stocks, we expect the second wave to focus on what we call ‘value with a future’; in other words, companies with inexpensive valuations that do not discount their sustained earnings growth ahead. Given the polarization we have seen in emerging markets over the course of 2020, there still are attractively valued opportunities to choose from.

Figure 1: MSCI Emerging Markets Value and Growth Indices

Source: MSCI, Robeco, May 2021.
This phenomenon was reflected in the performance of Robeco’s Fundamental Emerging Markets Equity strategies, which have an inherent value tilt, consistent with our investment philosophy. Starting from the second half of 2020, these strategies substantially outperformed the MSCI Emerging Markets Index, gross of fees (see Figure 1).

Portfolio positioning

With the gradual comeback of value stocks, we only made minor adjustments to our positions in emerging markets. We modestly increased our exposure to deeper value by taking profits in selective growth names in China, but also in some IT hardware stocks in Taiwan and South Korea, all of which outperformed strongly in 2020.

With the proceeds, we increased our positions in Financials and Materials, where we believe some attractive value opportunities are to be found. For example, we participated in the IPO of a Brazilian company that has a large market share in iron ore exports to steel-hungry China. After an initial share price return of 22%, the company is still trading at a very low price-to-earnings ratio of six times.

We also increased our positions in the Financials sector in India and Greece, and initiated positions in a South Korean manufacturer of construction equipment. We think this company, which is trading at an attractive valuation, will benefit from the global increase in infrastructure investments over the next couple of years.

Subjects related to this article are:
Logo

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree