Since the start of the year, the US, Europe and UK indices are all up, from 15.38 per cent in the case of the FTSE to 26.29 per cent in the case of the S&P 500. Emerging markets, by contrast, have only just returned to positive territory, picking up a meagre 2.39 per cent since January.
Year-to-date performance of indices
Source: FE Analytics
It is often a good time to buy into a sector or region that has experienced a period of relative underperformance. But there are a number of headwinds facing emerging markets – such as the slowdown in China and a hazy outlook related to the impact of the tapering of QE – that are making investors hesitant.
Neil Veitch, manager of the SVM UK Opportunities and SVM World Equity funds, says there are a number of developed market stocks that are able to access the gains of the emerging world, without taking on so much risk.
“There will be ongoing volatility, so playing emerging markets through western companies will limit some of that volatility,” he said. The manager says that valuations among emerging market companies are not that attractive, but he is finding good deals in western companies that are exposed to the sector. He adds that corporate governance standards are better in the developed world, which gives an added layer of stability.
Aberdeen Asset Management
Veitch likes UK-based financial services firm Aberdeen Asset Management.
“They are cheaper than they’ve been in a while,” he said.
The manager says there are many reasons to be positive about the outlook for Aberdeen: many of its funds are focused on the emerging world, which could see a turnaround. In addition, its recent acquisition of SWIP could lift the share price.
The stock has been fairly volatile over the last 12 months, but year-to-date it is up over 10 percentage points more than the FTSE 100, with gains of 23.43 per cent.
Since Aberdeen joined the FTSE 100 index in March 2012, it has returned 89.53 per cent, compared with 17.5 per cent from the index.
Performance of stock vs index since Mar 2012
Source: FE Analytics
Aberdeen was trading at 455.7p per share at the time of writing and is trading on a price/earnings (P/E) ratio of 11.2 per cent – its lowest since 2011. It also has an attractive yield of 4.2 per cent.
BMW
Another firm Veitch says is poised to take advantage of an emerging markets rally is German car maker BMW.
“BMW gets 20 per cent of its revenue from China,” he said.
While there have been concerns about the fate of China, particularly its banking sector, Veitch expects growth to rebound and says recent reforms should improve its corporate governance.
“Growth in China will see a cyclical rebound in growth or at least stabilisation, which will be a driver of change in sentiment towards emerging markets,” he said. “Reforms are unlikely to impact growth over the next one to two years. It does remove some of the uncertainty around Chinese policy-making.”
BMW is up 17.5 per cent over the past 12 months.
The stock has a dividend yield of 3.12 per cent.
Synthomer
British-based chemicals company Synthomer is another stock that features in Veitch’s portfolios.
“It should benefit from structural growth in Asia and construction in Europe,” he said.
The FTSE 250 stock has picked up 594.16 per cent over the past five years compared with just 183.33 per cent from the index. However, it has had a tough time recently, losing 4.15 per cent over the last three months.
Veitch says the stock is still a good one for targeting a turnaround in the fortunes of emerging markets and adds that its recent underperformance makes it a better value buy.
Performance of stock vs index over 5yrs
Source: FE Analytics
Synthomer was trading at 230.4p per share at the time of writing, with a yield of 2.6 per cent. It is trading on a P/E ratio of 11.4 per cent.
Maersk
Veitch says the Danish shipping company Maersk should profit from trade-growth in emerging markets.
“Maersk will benefit from a recovery in global trade from the West as that feeds through globally, to China in particular,” he said.
Maersk has been the largest operator of container ships and supply vessels in the world since 1996.
The stock has picked up 34.51 per cent over the last 12 months and has a dividend yield of 2.33 per cent.
HSBC
In terms of financials, Veitch likes global bank HSBC, which has a significant presence in Asia.
“We still think it’s a strong business with liquid balance sheets. Investors will be paid to wait for an improvement in sentiment towards China,” he said.
The bank has seen mixed performance over the years and has been volatile throughout 2013. Year-to-date the stock is only up 4.35 per cent, compared with 13.29 per cent for the FTSE 100.
Year-to-date performance of stock vs index
Source: FE Analytics
Over the longer term, the blue chip bank has tended to trail the FTSE 100. However, its sustained period of underperformance could signal a rebound, according to the manager.
HSBC was trading at 647.60p at the time of writing, with a strong yield of 4.8 per cent. It is trading on a P/E ratio of 11 per cent, making it cheaper than it was throughout 2012.
