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Bulls See Room to Run After 8-Month Gain in Emerging Markets

Here’s what money managers had to say about the rally.

By Aline Oyamada

(Bloomberg) --You have to go back to 2004 for the last time emerging-market stocks racked up a longer series of monthly gains. And bulls say the good times should keep going.

Mark Mobius of Templeton Emerging Markets Group,  Alejo Czerwonko at UBS Wealth Management and a host of money managers from Standard Life to Lazard Asset Management are finding reasons to buy. Although valuations are climbing, optimists say corporate earnings will improve as economic growth rebounds, supporting another leg-up for equities.

“Emerging-market stocks are still extremely attractive,” said Brian Wolahan, a senior portfolio manager at Acadian Asset Management in Boston, whose fund for developing-nation stocks topped 92 percent of peers over the past year. He cites price-to-earnings ratios at a discount of more than 20 percent to developed markets, far below the 10-year average.

Stocks and currencies from developing nations are poised for their best year since 2009 as a drop in volatility with a relatively benign political and economic backdrop encourage bets on emerging markets. While Wall Street veterans from Jeff Gundlach to Ray Dalio have warned risky assets are overvalued, others are finding reasons to stay bullish as the benchmark index notches its eighth straight monthly advance and a 26 percent gain this year. The MSCI emerging markets stock gauge rose 0.3 percent as of 9 a.m. in New York.

Here’s what money managers had to say about the rally:

Czerwonko, an emerging-market strategist at UBS Wealth Management

  • "The strong year-to-date performance is justified as earnings have picked up 16 percent in U.S. dollar terms during the same period"
  • The firm is overweight stocks in China, Indonesia, Thailand, Turkey and Russia
  • Underweight in Taiwan, Malaysia, the Philippines and South Africa
  • Main risks for the outlook are central banks becoming more hawkish, fresh geopolitical concerns and renewed fears on the sustainability of China’s growth outlook
  • “The solid global and EM macro backdrop and our expectation for 3 percent – 5 percent earnings growth in the next six months should support further upside for the asset class”

Mark Vincent, money manager at Standard Life Investments

  • Says emerging-market stocks attractive as earnings rise, profit margins recover, consumer demand increases while inflation is under control and the dollar is weak
  • Likes Russian and Korean stocks; also favors Brazilian banks and Chinese Internet-related companies
  • “We have been less bearish than consensus in China”
  • Standard Life Investment Co - Global Emerging Markets Equity Income Fund has beaten 88 percent of its peers in the past year

Rohit Chopra, portfolio manager at Lazard Asset Management

  • “We are seeing returns on equity in EM once again at a premium relative to developed markets. And I think that is a very unique opportunity because EM is still at a hefty discount relative to developed markets”
  • Lazard had $201.4 billion in assets under management as of June 30

Wolahan of Acadian Asset Management

  • “Emerging-market economic fundamentals are still improving and EM have a leveraged exposure to global growth”
  • Overweight Turkey and favors technology stocks over consumer
  • Underweight Taiwan as market is expensive and reducing position in Brazil toward neutral due to stretched valuations
  • Acadian has $86 billion in assets under management

Mobius, executive chairman at Templeton Emerging Markets Group

  • Emerging markets will outperform developed market equities on faster economic growth, rising incomes and cheaper valuations
  • “This outperformance can run about five years once you have momentum”

--With assistance from Carlos Torres.To contact the reporter on this story: Aline Oyamada in Sao Paulo at [email protected] To contact the editors responsible for this story: Rita Nazareth at [email protected] ;Jeremy Herron at [email protected] Brendan Walsh

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