But the ongoing underperformance in emerging markets could be opening up some cheap opportunities for the more adventurous investor and there are a number of large UK companies that derive much of their growth from the emerging world.FE Trustnet spoke to the experts to find out which stocks they were using to take advantage of cheap prices in emerging markets.
FE Alpha Manager James Henderson is picking up low-hanging fruit in the battered commodities sector, which is correlated to emerging markets growth.
Henderson (pictured), manager of the Henderson UK Equity Income & Growth fund, says Rio Tinto is now better placed to benefit from emerging markets growth and deliver value for shareholders.
The stock has disappointed over the last 12 months, making just half the returns of the FTSE 100.
It has stormed ahead over the past six months, however, picking up 15.16 per cent while the blue chip index has gained 7.08 per cent, according to FE Analytics.
Performance of stock vs index over 6 months
Source: FE Analytics
Tom Ewing, manager of the Fidelity UK Growth fund, also thinks Rio Tinto is poised for a rebound, particularly owing to China’s ongoing need for commodities.
“I also have exposure to the mining company Rio Tinto – the current price for this stock assumes a very substantial fall in iron ore prices, but I don’t see this,” he said.
“I expect Chinese demand to hold up quite well given robust, albeit slower, economic growth compared with the last decade and despite the rebalancing that’s taking place.”
Ewing thinks there are a number of compelling buying opportunities in emerging markets, particularly in China, where he says significant investment in infrastructure and technology over the last decade has created a whole new platform for sustained growth and driven up consumer demand for better and better goods.
“I own a number of consumer staples stocks with significant exposure to China, including Unilever and Diageo,” he said.
“I also own Michael Page, which should benefit from the growth in service sector jobs in China.”
Martin Cholwill (pictured), manager of the five crown-rated Royal London UK Equity Income fund, says one thing that’s causing him to hold back from companies exposed to emerging markets is the large number of earnings downgrades that have come through.
The manager says the majority of these downgrades are currency-related, which means investors need to be even more diligent when considering the potential risks to companies exposed to the developing world.
“Obviously we’ve had a warning from Diageo, which I think is much more transactional based – in other words selling products into these countries that have less purchasing power,” he said.
However, Cholwill says he is taking advantage of the opportunity to buy British American Tobacco (BAT) on the cheap.
The stock has been a stellar performer over the long-term, delivering nearly five times the returns of the FTSE 100 over the last decade.
However, it has had a tough time over the last 12 months, shedding 4.21 per cent while the FTSE 100 has gained 12.34 per cent.
Performance of stock vs index over 1yr
Source: FE Analytics
“It’s a good example of a share that has underperformed on the back of emerging markets worries,” he said.
“The dividend yield is now up over 4.5 per cent and, having reduced my holding a couple of years ago when the shares were only yielding 4 per cent, the shares have underperformed a long way so it’s a great opportunity in my view to get back into a quality company having seen underperformance in the share price.”
Jamie Forbes-Wilson, manager of the AXA Framlington Blue Chip Equity Income fund, also likes BAT’s chances.
“It is the second-largest European tobacco company, with more than half of its profits coming from emerging markets,” he said.
“The shares are trading at a discount to other consumer staples, which has widened in recent weeks. The company should be able to accelerate its organic profit growth by taking more pricing to offset the foreign exchange declines.”
Forbes-Wilson is also playing the financial sector to grab some emerging markets momentum, backing life insurance giant Prudential for its resilience in even the toughest economic conditions in Asia.
Jeremy Hall, partner at Cartesian Capital Partners, also likes Prudential, which he says has suffered from currency fears and macroeconomic uncertainty in Asia.
“Structural factors in Asia such as high ‘protection’ content of life policies, as well as their regular premium nature, suggest Asia should be resilient,” he said.
“Growth in Asia is coming from premium inflows from existing customers, therefore it should be insensitive to macro market movements. We believe Prudential represents a compelling cash and capital story, given its strong free cash generation; this should lead to further positive dividend rebasing in the future.”
Unlike the other stocks mentioned in this article, Prudential has fared well compared with the FTSE 100 over the short-, medium- and long-term.
The stock has made 45.91 per cent over the past year, nearly four times that of the FTSE 100.
Performance of stock vs index over 1yr
Source: FE Analytics
Another financial sector stock that is well placed to profit when emerging markets rebound is Investec, according to Royal London Asset Management’s Derek Mitchell.
Mitchell, who runs the firm’s UK Opportunities fund, says the stock has been “ravaged” by the sell-off in emerging markets and, since it is headquartered in South Africa, further beaten up by the depreciation of the rand.
“But a recent change to management compensation…signals that change is underway,” he said.
“Recent press comment suggests a sale of the majority of the Australian banking business. This could be the start of its reinvention, re-allocating capital away from non-core assets in the speciality bank, which have the highest risk-weighted capital and negative returns to the wealth or asset management businesses, and/or an increased distribution.”
“In the meantime there is a 5 per cent dividend with clear risks to the upside,” he added.
Investec is a member of the FTSE 250 index and has been trailing other mid cap stocks for several years.
The stock has lost 6.04 per cent over the last 12 months, while the FTSE 250 gained 24.19 per cent.
The share price has spiked in the last month, however, which could add fuel to Mitchell’s optimism about it.
