Thanks to Canaccord’s Alan Brierley for his slides highlighting some interesting contrarian opportunities. The four he presented were MSCI World Value (having underperformed MSCI World Growth), MSCI World ex US (versus S&P Composite), MSCI Emerging Markets (versus MSCI World) and Euromoney Global Mining (versus MSCI AC World). The four had underperformed their respective comparator by 19, 39, 43 and 73% respectively in recent years.
"The ‘region’ is stuffed full of corrupt countries and poorly-governed companies"
What do we think about these opportunities? As multi-asset value investors, we’d certainly support the assertion that value will do well, though it is hard to know when it will start outperforming growth. Since inception of the indices in November 1975, the MSCI World Value index has returned 7.4% per annum versus Growth’s 6.8%. This may not sound like much until one realises that over the 40 years, Value’s total excess return equates to a very decent 22%.
As for the MSCI World ex US in relation the S&P Composite, we’d also agree that the US will start to underperform (in our Income Fund we have zero exposure to US equities given paucity of yield). The US market is starting to look obviously expensive versus the rest of the world: the price to book ratio of the MSCI US index is 2.8 times versus 1.6 times for the World ex US index. While US companies may be more dynamic than those elsewhere, we think the valuation gap is too big. Furthermore, it is clear that the US is closer to its business cycle peak that other developed countries, notably Japan and many in Europe, so monetary policy tightening is also closer.
The emerging markets versus developed markets question is a particularly intriguing one. I have for a long time held the view that emerging markets are horrible places to invest. The ‘region’ is stuffed full of corrupt countries and poorly-governed companies, and as a result the stronger economic growth achieved has not filtered down to shareholders. Since inception of the index in 1987, the MSCI Emerging Markets index has returned 7.7% per annum. This compares with 7.8% for the MSCI US index, pretty poor when you consider the difference in economic growth.
Furthermore, when you take volatility into account, you’d wonder why anyone would invest in emerging markets: 29% versus 17% for the US. Having said all that, the current price to book ratio of the MSCI EM index of 1.4 times is getting close to the 1.2 times it reached at depths of the global financial crisis. We’re still underweight emerging market equities but are starting to think there is value emerging.
Finally, what about global miners? Well, in August we made a move into Blackrock World Mining Trust, feeling that the 10% yield that was on offer was good value even if dividends were halved. So we’d agree with Alan on that one too.
Published in Investment Letter, November 2015
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.