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The cheapest stock market in the world

27 February 2014

JPM’s Peter Kirkman says valuations in emerging markets are at their lowest point since 2009 and he is confident they can outperform their developed counterparts this year.

By Daniel Lanyon,

Reporter, FE Trustnet

Chinese financials are the best value stocks in the world, according to Peter Kirkman, manager of the JPM Global Consumer Trends fund.

Kirkman urges investors not to be panicked by the recent sell-off of emerging markets at the start of the year and recommends they take advantage of cheap valuations and focus on long-term trends, particularly in Chinese equities and its banking sector.

“Emerging market financials are the cheapest asset class in equities in the world, there is a big opportunity there.”

“That's the opportunity, because you're buying it cheaper than it has been for five years.”

“Investors will see outperformance provided you have a longer term outlook, but I think emerging markets will outperform the developed markets in 2014.”

“The last great buying opportunity for emerging markets was in spring 2009. There was a sentiment then there was too much risk and it was a dangerous time to buy, but actually it was the best buying opportunity for 10 years.”

The fund has done well since its inception in 2008, returning 65.06 per cent, but its performance has tailed off recently.

Performance of fund vs sector and index over 3yrs

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Source: FE Analytics

According to data from FE Analytics, the fund has returned just 14.78 per cent over three years compared with a sector average of 21.95 per cent.

Kirkman argues that the strength of his fund is in its strategy to invest in themes rather than simply looking for cheap stocks.

“Themes have longevity and are durable so don't really change over time, so we continue to focus the fund around growth in emerging market consumption, demographics, urbanisation and healthcare.”

He argues that developed world equities are set for a tough ride in 2014 as the effects of debt and then the Fed’s tapering are felt.

“Income growth in the US remains pretty tepid, you had an excess of credit into emerging market bonds, liquidity is tightening globally and aggregate debt in the world economies is much higher than in 2008.”

“This year it is going to be much tougher than last year to make money because stocks are not as cheap as they were and are more vulnerable to risks and volatility.”

“We still have more debt in the system than we had pre-crisis, I don't think that's a healthy environment.”

“The exception is in emerging markets, where you didn't see any of this multiple re-rating.”

Kirkman has joined many managers in arguing that emerging markets are too easily lumped together as an asset class.

He sees China as being a much safer bet than other big growth stories, such as Turkey, due to its lack of political risk and rising consumer incomes.

Performance of indices over 3yrs

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Source: FE Analytics

According to data from FE Analytics, the Chinese equities index has fared better than the emerging markets index over three years, falling 1.74 per cent compared with 9.33 per cent.

However, it still underperformed the MSCI World index after being hit by fears regarding its banking system, the tapering of the Fed's QE programme and a general economic slowdown in the country.

“We purposefully target China as it adds more to consumption growth than the US does. India is also growing very fast too, but income levels are so small that they are not necessarily that meaningful.”

“You need to believe in China if you're going to believe in EM because it's the biggest component, it's still the biggest growth driver for a lot of these EM-focused businesses.”

Aside from his prediction that emerging markets will outperform developed markets in 2014, he predicts China will grow faster than developed markets for a decade.

“In China you've still got an urbanisation story, which has a huge multiplier effect because you get better education and higher growth in GDP because it’s more productive.”

“Growth in income is steady, consumption growth has continued at a high single-digit rate, credit has been growing fast and public sector debt is low.”

“A lot of the reasons countries get into trouble is that they borrow too much and when foreign capital comes out people are in big trouble, whereas particularly in the case of China, it’s not reliant on foreign capital, which is a big, big difference.”

Jonathan Kent, head of financial intermediaries distribution, UK and Ireland, Deutsche Asset & Wealth Management, warned recently in an article for FE Trustnet that investors who have been panic-selling out of emerging markets would soon regret it.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.