Schroders’ Kirrage: Valuations starting to flag up newly unloved emerging markets


Shouting “Portugal sparks new euro fears”, the main headline on the business section of The Sunday Times a week or two back may have referred to yet another of those oh-no-not-again euro-horror stories but tucked down the bottom of the page was an altogether less familiar beast. Yes, “Growth doubles as all cylinders fire” pointed readers towards an actual good-news story on the UK economy.

“All four headline sectors of the economy – services, industry, construction and agriculture – are expected to have expanded in the April to June quarter, for the first time since the third quarter of 2010,” the article began and, while we would not want to take this too far – the UK economy is not suddenly flying – it did seem to mark an interesting switch in mood.

That sense was only strengthened by the way the rest of the paper was full of bearish pieces on China and other emerging economies. Yet imagine what would have happened if you had told someone just 18 months ago that, come the summer of 2013, the emerging markets would be struggling while the UK economy would quietly be enjoying a bit of an economic bounce.

They probably would have laughed, they may even have called the police and they would have been most unlikely to have stuck around long enough to hear your prediction that, over the three years to mid-2013, the emerging markets as a whole would underperform their developed counterparts, with the so-called ‘BRIC’ economies of Brazil, Russia, India and China doing even worse.

With much of the news now informing the likes of those Sunday Times headlines already discounted by the stockmarket, however – and as the following graph from Societe Generale analysts shows – that is what has happened. Just because they enjoy great long-term demographics, it does not mean emerging markets will always outperform – yet three years ago the wider market had ignored that possibility.


Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

Of course, we never tire of stressing the importance of using valuation as your guide and that will often encompass taking a contrarian approach to investing. To put it another way, valuation can simply be a reflection of where the broader market does not discount something happening.

This necessarily takes us down some fairly lonely roads – recent years, for example, finding us trumpeting the value to be found in the more unloved sectors of the UK, while other investors chased anything with the faintest connection to emerging markets. Now, however, we would argue emerging markets are starting to look cheap – particularly on some ‘old-school’ metrics, such as price-to-book.

The inevitable ‘but’ is similar to the caveat in our recent pieces on potentially attractive valuations in the US – you need to be discerning. A bit like Europe, emerging markets look cheaper overall but they include some good value in risky-looking economies and more expensive stocks in healthier countries. Nonetheless, emerging markets are definitely starting to look interesting from a value perspective.

Nick Kirrage is a fund manager in Schroders’ UK value team and writes at The Value Perspective