Laurence Bensafi, Portfolio Manager & Deputy Head of EM Equities, looks at the stories behind the current valuations of four emerging market economies – India, Vietnam, Indonesia and South Africa.
India has always been one of the more expensive countries in our emerging markets universe, as it has a greater number of high-quality stocks and a strong structural growth story, however, over the past year, it has become increasingly expensive. In our view, India deserves to trade at a premium, but the rich valuations and high expectations remind us to be extra mindful and disciplined when it comes to valuation.
The most over-valued areas are the small and mid-cap segments of the Indian equity market, as well as companies in some of the more government-sensitive sectors. However, it is certainly possible to find reasonably valued Indian equities, and there are large divergences in valuations from sector to sector, and even between companies. In particular, within financials, IT services, and pharma, we see companies that are relatively valued, with quality management and operations.
Looking across to southeast Asia, Vietnam has faced difficulties in recent years, driven by a deterioration in its property market, and a sudden shortage of liquidity due to anti-corruption crackdowns and regulatory reforms of the corporate bond market. The market is volatile and de-rated, meaning that foreign investors need to be cautious. However, from a valuation perspective, Vietnam looks interesting. It experienced 6.4% growth in gross GDP year-on-year in the first half of 2024(1), showing strong economic performance. The country functions as a great hub for Asia in terms of outsourcing, and it has benefitted from shifts in global supply chains over the last few years. It is becoming a new manufacturing hub, attracting increasing amounts of foreign investment from global companies such as Apple, Samsung, and Intel. Supply chain relocations from China to Vietnam are still concentrated in low value-added production, such as final assembly, where Vietnam has a comparative advantage with its lower labour costs.
We believe that Indonesia also has strong investment potential, as one of the fastest growing and strongest economies, not only in southeast Asia but also in emerging markets. It has a diversified economy and is blessed with a wealth of natural resources, notably coal, nickel and copper. Both domestic consumption (53% of GDP) and exports of downstream commodities products are helping to generate a strong current account. At the same time, Indonesia is in the middle of a political transition, and there are some concerns on the fiscal side. This has led to a sell-off, making the market interesting to us, as value investors.
Finally, one market that has fallen out of favour in recent years is South Africa. However, following a surprise election result earlier this summer, which led to the new Government of National Unity (the GNU), the country’s fundamentals are improving. Positioning is also low, meaning that there is a lot for value investors to discuss. Between the resolution of ongoing power issues in the country and the improving quality of corporates, South Africa is becoming an interesting market once again.
As long-term equity investors, we understand the need to be selective and to recognise that the world is constantly changing. Our research suggests that management quality can make a significant difference to the performance of a company and its ability to navigate challenging market conditions. Across our universe, it is therefore important to evaluate company management as a core part of our investment process and to focus on companies with durable business practices that are able to achieve sustainable, long-term returns.
(1) Vietnam economy in H1 2024: strong performance in key indicators (vietnam-briefing.com).
