AllianceBernstein chief investment officer of emerging market value Henry D’Auria said emerging market investors have remained invested in relatively safe and predictable stocks, “to the extent that their equity portfolios are now overpopulated with expensive, defensive investments”.
“Nearly two-thirds of actively managed emerging-market equity portfolios are in stocks trading at premiums to the market of 10 per cent or higher, with the largest portion skewed to those premiums above 20 per cent,” said Mr D’Auria.
“This is a big change from the past, when dispersions have usually been much more even,” he said.
Mr D‘Auria said while emerging markets have largely missed out on the risk rally seen in developed markets in the past two years, “this is unlikely to continue indefinitely”.
According to AllianceBernstein, one of the reasons for the underperformance in emerging markets is an apparent weakening of the economic linkages between emerging and developed markets, which has resulted in emerging markets responding more slowly than usual to improving activity in the developed world”.
“Of course, much will depend on how emerging-market economies progress next year, but forward-looking indicators suggest that emerging-market activity is finally getting the boost from the developed-world recovery,” said Mr D’Auria.
Mr D’Auria said as value has underperformed in emerging markets for some time, there is opportunity surrounding “long-neglected high-beta cyclically sensitive stocks”.
He said the opportunity is “far more sensitive than usual to broad emerging-market economic trends”.
Despite some of the recent rebounds, AllianceBernstein believes high-beta stocks will continue to sell at some of the “deepest discounts to overall emerging markets in more than 15 years”.
“They are extraordinarily cheap versus low-beta, defensive stocks, which are trading near record premiums,” said Mr D’Auria.
“Emerging-market investors need to consider the risks of overplaying the safety card - we think a rebalance to value is in order.”
