Emerging market shares show signs of capitulation

Emerging market shares are showing signs of investor capitulation after some of the steepest declines in the global stock market sell-off and that should make them attractive over the long run, said Arjun Divecha, who manages $7.4 billion as head of GMO's emerging markets equity division. "The real case for emerging markets is two-fold: longer-term demographics and long-term economic growth. What you've seen is investors throw out that story," he said.
The MSCI Emerging Markets Index is down 12.1 percent over the last three months, nearly double the 7.1 percent decline in the US benchmark S&P 500. Investors pulled $2.7 billion from emerging markets stock funds in January, more than half of the $3.9 billion they pulled from such funds in all of 2015, according to Lipper data. As a result, Divecha has been moving more of his portfolio into Taiwanese technology companies, Russian energy companies and Turkish banks that are trading at very low valuations, he said. His largest positions include stakes in Taiwanese wireless communications company Hon Hai Precision Industry Co, Russian gas giant Gazprom, and Indian bank HDFC Bank Ltd.
"Russian energy companies are ridiculously cheap," he said in an interview. Gazprom, for instance, trades at a price to book value of 0.3, or about a third of the price of its assets after liabilities. Exxon Mobil Corp, by comparison, trades at a price to book value of 2. That is not to say that he expects a broad rebound soon. "Looking at the horizon of three to six months, it's hard to see any catalyst," Divecha said. The rising value of the dollar will also hem in any potential gains, he said.
His biggest underweight is Chinese stocks because of rising concerns that the country could have a financial crisis. He now estimates that there is a 40 percent chance China's economic slowdown could trigger financial panic, up from 10 percent last year. Divecha is also increasing his positions in frontier markets such as Vietnam and Qatar, and said that he would "love to invest" in Iran as soon as it becomes legal for US-domiciled funds. Vietnam's highly educated workforce, in particular, makes it particularly attractive even as its gains are coming mainly from low-end manufacturing jobs shifting away from China, he said. "This is a place that has the potential to grow very rapidly for a long period of time," he said.