Our last email reminding investors that the darkest hour is often just before the dawn prompted a good deal of debate. Allocators realise that picking their moment to buy the Emerging Markets following the ravages of C-19 will define their track records for years to come.
Some of this debate revolved around the old Growth/Value chestnut as it relates to Emerging Markets.
I thought you might like to see the following chart. It represents the ratio of the MSCI GEM Growth Index/MSCI GEM Value since 2007.
Source: Bloomberg 31st March 2020
As you can see the outperformance of Growth over the last 10 years is accelerating. One investor spluttered “Who would buy a stock with a chart like that?!” But before submitting to this knee jerk reaction, read on.
Of course there may be the odd reversal at some point, but what we think is interesting is that the previous reversals in favour of Value have been increasingly rare and short lived even after events which suggest the time is ripe for investors to seek out the shelter supposedly offered by such stocks:
- the aftermath of 2008, when the world was last coming to an end, and the ratio for the most part flat-lined until 2012
- Q4 of 2016 when Donald Trump’s election victory prompted a reflation trade and a spike in bond yields that would generally favour value or
- Q3 and Q4 of 2018 when Sino/US trade friction threatened to derail global growth
The latest spike has undoubtedly been helped by the strength of online businesses such as Tencent and Alibaba as beneficiaries of C-19, as well as, at the opposite end of the spectrum, the demise of the oil stocks courtesy of the Saudis. Cuts to dividends will also play a part in undermining Value.
The reversion to mean between Value and Growth has become increasingly shallow and short lived in the last decade because of a whole host of factors (that we mentioned in the Darkest Hour piece above and which have been subject to a number of studies*). We believe a number of these are irreversible (are fossil fuels really ever going to stage a come-back? how are dividend cuts undermining the Value argument for banks? will the internet stop disrupting from here on?) making a major and sustained reversion increasingly unlikely.
Of course, from time to time investors may well exhibit a Value bias but we believe by focusing exclusively on the inexorable growth of the GEMs consumer we shall deliver better returns to our shareholders. Our focus on Growth, in other words, will outweigh these periodic aberrations.
But rather than going to the wall over the imponderable of Value’s long awaited reversion, perhaps the best we can offer is that were you to choose a barbell approach to EM (one value manager and one growth merchant), then Aubrey has something both different and decent to offer in the case of your quest for the latter.
* One that caught our eye at the end of last year was by Professor H Park of the City University of New York and entitled” An Intangible-adjusted Book-to-market Ratio Still Predicts Stock Returns”
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