Looking for value in all the right places
For investment managers prepared to look beyond domestic markets there are huge opportunities to create value by investing globally.
Companies from the US and Canada dominate the MSCI World Index, representing just over 50 per cent of its value, but the two countries are only responsible for 32 per cent of world GDP.
While the US remains the dominant force globally for now, economic growth in emerging market regions has been outstripping that of developed countries for years.
These economies are in increasingly good shape, and companies based in them are becoming more focused on profitability and treating shareholders well.
No wonder then that the conventional wisdom about investing in emerging market equities, namely, that these markets are riskier and less shareholder friendly than developed ones, is being challenged.
Our global equity portfolios are underweight the US. This is not because we can’t find good quality companies in those countries, there are many of them, but simply because we can generally find more attractive value opportunities elsewhere.
Consequently we are overweight in Asia Pacific and emerging markets, where valuations are more attractive and earnings growth rates are often greater.
The global energy sector provides an example of where we have found long-term value within emerging regions.
Our analysis has shown that a company such as Petrobras in Brazil is not only cheaper on a price earnings basis than the likes of Australia’s Woodside or UK’s BP, but also has a strong production growth and reserve life and high level of dividend yield.
But deviation from the benchmark doesn’t have to mean a bias towards emerging markets.
We also favour Japan, seeing value opportunities there that will unfold as the economy emerges from its slumbers.
Within our Japanese holdings we have a preference for domestically-focused stocks, and we expect our stakes in companies such as financials Bank of Kyoto and Orix to bear fruit over the long term as the country’s interest rate environment improves.
Similarly, our modestly overweight positions in Europe are also a reflection of the good companies available in those regions.
For instance, we have found value in telecommunications companies such as Belgium’s Belgacom, Portugal Telecom and UK’s Vodafone.
To add alpha, investment managers must have the confidence to move away from benchmarks and invest in an unconstrained way on a truly global basis, focusing only on finding quality individual companies. Shares in such companies should outperform in the medium to long term, regardless of their origins.
Stephen Docherty is head of global equities at AberdeenAsset Management .
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