Fastest emerging-market rotation in a decade seen far from over

Emerging-market investors are switching to value stocks and away from growth ones at the fastest pace in more than a decade, and some say the trend may last up to another 12 months.

The rotation trade triggered by progress toward a coronavirus vaccine and the US election will favor equities in countries such as Mexico and Indonesia over places like China and Taiwan, according to AMP Capital Investors. Eastspring Investments is betting on South Africa where shares have lagged behind their peers this year, while UBS Wealth Management says the switch toward value may last for up to a year.

One way of classifying developing nations into value or growth is by looking at how their performance has been correlated with the ratio between MSCI Inc.’s growth and value indexes. The two highest positive readings in a Bloomberg analysis of 18 markets are for China and Taiwan, confirming their status as growth leaders, while the lowest include countries such as Thailand, Hungary and Brazil.

“The obsession over what happens tomorrow or next week, has seen loss-making tech companies flooded with capital, whereas profit making but economically sensitive areas have been totally left behind,” said Nader Naeimi, head of dynamic markets in Sydney at AMP Capital Investors, which oversees the equivalent of $137 billion. “When global excess money supply is plentiful, that leaves plenty of room for re-rating in the forgotten areas.”

Naeimi says his top picks include Southeast Asia countries like Malaysia, Thailand and Indonesia rather than technology-heavy North Asian markets such as South Korea and Taiwan. In Latin America he likes Brazil, Mexico and Chile.

Seeking Laggards

The switch toward value that has swept over global financial markets this month is being driven by investors seeking out industries that lagged behind when the coronavirus shock favored growth stocks in sectors like technology. In emerging markets, value shares are now beating growth ones by the most since 2008, with the ratio between the two groups jumping as much as 8% this month.

Global value funds saw the highest inflows this year in the week ended November 18 at $4.3 billion, compared with growth funds which added just $493 million, according to a report by Jefferies Financial Group Inc., citing EPFR Global data.

Eastspring Investments is another money manager on the lookout for value shares.

“The market has oversold financials across emerging markets and we have found many bottom up opportunities here,” said Samuel Bentley, a client portfolio manager in Singapore at Eastspring, which oversees $220 billion. While the company’s biggest holdings are in South Korea where it sees value opportunities, it also likes “unloved stocks” in South Africa and Mexico, he said.

Countries with high value ratings have been leading gains over the past month. The Philippine stock benchmark has outperformed all other major emerging markets, jumping 17% in local-currency terms, while Thailand has risen 14% and Mexico 11%. At the other end of the spectrum, Taiwan’s benchmark has climbed just 6.5% and China’s Shanghai Composite Index only 1.1%.

‘Sustained Inflow’

UBS Wealth Management says the rotation trade could be more sustained than usual.

“With massive fiscal stimulus programs feeding through the economies and the re-activation of pent-up demand thanks to vaccines, value could see a more sustained inflow, in particular, once interest rates start to drift higher,” said Adrian Zuercher, head of global asset allocation at UBS Wealth in Hong Kong.

That’s not to say that UBS Wealth has written off North Asia, Zuercher said. The firm has shifted more funds into South Korea, which it considers to be better value than Taiwan or China.

Veteran emerging-market investor, Mark Mobius of Mobius Capital Partners, has a similar view.

While stocks in North Asia may still perform well, “some of the other markets will come up from behind, particularly those that have been very unpopular for one reason or another,” he said at an investment forum this week