Emerging Markets down to 17 months low attracts US investors

NEW YORK (Reuters) – The sharp drop in emerging market equities since the start of the year is drawing some US fund managers who believe they can find long-term deals in the sale.

Portfolio managers Harding Loevner, Federated Investors and Wells Fargo are among those who have added emerging market equities to their portfolios in the face of President Trump's imposition of import duties and rising interest rates in the United States.

Emerging market asset prices were hit hard this year. The MSCI Emerging Markets Equity Index .MSCIEF ended Friday at its lowest level since May 2017, down about 21% from the January high. An MSCI Emerging Market Currencies Index .MIEM00000CUS is down 8% from its peak of 2018, reached in March.

Thursday, JPMorgan lowered its rating on Chinese equities, the largest weighting of the benchmark, against the overweight to expectations that a prolonged trade war with the United States would hurt the Asian giant's economy. next year.

Yet some international and global fund managers in the US say emerging markets offer better deals than the US, where equities continue to break records.

"We are finding opportunities through the trade war," said Chris Mack, portfolio manager of the Harding Loevner Global Equity Fund.

US President Donald Trump has imposed tariffs on more than half of the $ 500 billion of US imports from China, for which Beijing has responded.

Investor anxiety over the impact of the trade war has led to a sharp drop in inventories in China and other emerging markets this year.

Mack's fund has the highest weighting in emerging market equities since 2006 and the lowest in the US since the same year, in search of better values, he said.

The fund sold its position in Google's parent company, Alphabet Inc (GOOGL.O) and bought from Samsung Electronics (South Korea)005930.KS). Investors are paying more than $ 25 for every dollar of earnings expected over the next 12 months at Alphabet, while they are paying just over $ 6 at Samsung, according to estimates of the expected P / E ratio.

"You get the benefits of a business that is driven by a secular trend at a much cheaper price," Mack said.

(Chart: US equity valuations versus emerging markets – reut.rs/2NqqUOr)

Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management, said his company has recently strengthened its position in emerging markets from negative to neutral. The reasoning behind this decision included convincing assessments and the likelihood that trade tariffs would not hurt emerging market companies as much as the broader market would predict.

"People are slow to realize that the United States will not close its borders to all emerging markets," he said, adding that Vietnamese companies could benefit if the United States and China continue to slap themselves mutually. goods.

Overall, the portfolios of US global funds account for nearly 7% of emerging market equities, 25% more than 3 years ago, according to Lipper, a Refinitiv Group company.

Yet this year the Vanguard FTSE Emerging Markets ETF ($ 58.1 billion)VWO) is down almost 15% and has posted exits of about $ 2 billion since July, according to Lipper. It closed Friday at its lowest level since March 2017.

However, there are signs that the tide may already be turning.

Investors have poured money into equities and emerging market debt at the fastest weekly rate since April, according to an analysis of EPFR data by Bank of America Merrill Lynch on Friday. .

"I have never seen the sentiment (on emerging market equities) of being so negative when the fundamentals are pretty good," said Teresa Barger, co-founder and general manager of the hedge fund Cartica Management.

"When you find yourself in a situation like this, you usually see that individual investors are scared and out of the air, but institutional investors are coming in."

Barger looks beyond China to India and Brazil, two countries that may be less affected by US commercial rates, she said.

Yousef Abbasi, global market strategist at INTL FCStone in New York, also sees great success for emerging countries outside of China if the Washington-Beijing trade war intensified, especially Brazil and Indonesia.

"I would be very selective in looking for my exposure in emerging markets," he said.

"Look for countries with large reserves in US dollars, direct trading partners with the United States, and less (relatively) exposed exports to China."

(Chart: US equity valuations versus emerging markets tmsnrt.rs/2BWwo16)

(Chart: performance of emerging market benchmarks since the beginning of the year, tmsnrt.rs/2zTPbZm)

(Chart: Emerging markets currency performance since the beginning of the year, tmsnrt.rs/2Mh3iA9)