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Playing the value theme in emerging markets

Investing in a diversified ETF.

CAPE TOWN – Investing into emerging markets has become a major asset allocation theme across the world. With emerging markets showing higher levels of growth than developed economies, investors have been diversifying their portfolios to try capture some of this story.

Although South Africa is itself an emerging market, local investors have also looked for diversification into other markets in this space as local equities have begun to look expensive. It is also an opportunity to play different investment themes.

One such theme is a broad emerging market value approach, which investors can find through the iShares MSCI Emerging Markets Value ETF. The fund is available through the Standard Bank Webtrader Platform.

The fund tracks the MSCI Emerging Markets Value Index, which captures large and mid cap stocks presenting value characteristics in 23 emerging markets across the world. The stocks are measured on three variables – their price-to-book value, 12-month forward price-to-earnings (P/E), and dividend yield.

The ETF currently holds 472 different stocks, listed in 16 countries. This does include South Africa, although JSE-listed stocks only make up 7.69% of the portfolio. They include MTN, Sasol and Standard Bank.

The largest portion of the portfolio is allocated to Chinese counters, which make up 22.92% of the fund. An additional 13.18% is held in stocks listed in Taiwan, most of which have exposure to the Chinese market.

The four biggest holdings are all Chines companies. Telecommunications company China Mobile, is the largest at 4.4% of the portfolio, followed by China’s three biggest banks – China Construction Bank, Industrial & Commercial Bank of China, and Bank of China.

The fund also carries exposure to South Korea, India, Brazil, Mexico, Russia, Malaysia and Indonesia. Although the companies are listed in these markets, many of them are really multinationals such as Hyundai Motor Company, Samsung Electronics, and Infosys.

The fund currently shows a reasonably undemanding P/E ratio of 14.84 and a dividend yield of 3.55%. Its diversified holdings across geographies will also be a potential attraction to investors.

However, its recent performance has been less than stellar. After the last three years, it is down close to 10%.

Investors playing the value theme should however be prepared to face such periods of under-performance, particularly in emerging markets that can be volatile. It will take a calm head and conviction to take a long term view.

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