There are several reasons to think emerging market (EM) value stocks will outperform growth companies, according to AllianceBernstein’s Henry D’Auria, who is seeing a diverse range of opportunities in the market.
Emerging market shares had slightly outperformed those in developed markets during 2022’s turbulent conditions up now, with the MSCI Emerging Market index falling 11.7% (in US dollars) compared with a 12.8% decline for the MSCI World.
However, D’Auria , chief investment officer for emerging markets value equities at AllianceBernstein, pointed out that value stocks in EMs had held up even better: the MSCI Emerging Markets Value index was down just 8% this year versus a 15.2% slump for its growth counterpart.
This meant EM value shares were still up 10.5% since November 2020 even after 2022’s declines. Growth stocks, on the other hand, were in loss-making territory.
“It’s been a long time coming. Until November 2020, EM value stocks suffered nearly nine years of chronic underperformance, trailing the market by 28.1%. Throughout that period, extremely low interest rates encouraged investors to pay ever higher valuations for the fastest-growing companies, which fueled returns of emerging market growth stocks and portfolios,” D’Auria said.
“But rewind further and the picture looks very different. Between 2000 and 2012, EM value stocks had outperformed the MSCI Emerging Markets benchmark for 143 months. While past performance doesn’t guarantee future results, we believe that supportive macroeconomic and market conditions have potentially set the stage for a prolonged recovery.”
He explained that current valuations were one positive factor. EM value stocks were trading at a near-record discount to growth stocks even after their recent outperformance.
What’s more, they had delivered stronger earnings growth than the rest of the market during this period, meaning that their price/forward earnings multiples of value stocks remained “very attractive”. In addition, EMs were still relatively cheap compared with their own history and other developed markets.
AllianceBernstein also felt EM value shares would be attractive in the next stage of the macroeconomic recovery.
Higher inflation and rising interest rates was putting pressure on growth stocks as they pushed up the discount rate that investors used to price equities, making their future cashflows less attractive today. However, while value stocks were not entirely immune to this, their cashflows tended to be nearer term and their stock multiples tended to hold up better.
