Sharp emerging market sell-off creates pockets of value for discerning investors

The recent chaos in emerging markets has brought back uneasy memories of last summer’s sell-off. The MSCI emerging markets index fell from around 1,003 at the beginning of January to less than 932 on Monday, before stabilising in anticipation of the Federal Reserve meeting taking place today and tomorrow.

But should investors be put off developing world equities by such turmoil? According to Emily Whiting of JP Morgan, the blanket approach investors often adopt to emerging markets can mask important differences: “I would say they’ve been pulled down by a turn in sentiment, and we’ve seen sharper falls than the fundamentals would warrant.” Julie Dickson of Ashmore, meanwhile, sees attractive valuations in some areas. “The spread in valuations between the S&P 500 and emerging market equities is at the highest level in eight years, and countries like China are trading at historic troughs.”

Dickson says that the recent sell-off has been overdone, and that investors can find value by exercising greater discrimination. Chinese stocks recently fell to a five month low, for example, before recovering slightly yesterday. But long-term prospects are promising. “Chinese domestic consumption is healthy, and the mobile tech sector in particular is still growing strongly.”

But extreme caution should be taken in trying to anticipate the bottom of a market, and Jason Hollands of Bestinvest sees the potential for a value trap. “Despite the low valuations, there is always the possibility that the earnings side of the equation could fail to deliver, particularly in places like China, where we judge the probability of policy failure as relatively high.”

With this in mind, investors considering increasing their exposure to some emerging markets should do so gradually, drip-feeding money in tranches. Hollands recommends Lazards’s Emerging Markets Fund, which has outperformed the sector benchmark over the last five years, returning 82.4 per cent. For an Asia-specific option, he likes the Schroders Asian Alpha Plus fund, which has returned almost 150 per cent over the same period.