J.P. Morgan Money Manager Says Go ‘Granular’ on Emerging Stocks
(Bloomberg) -- Investors need to put contagion concerns aside and start looking for bargains among emerging-market stocks, according to JPMorgan Chase & Co. money manager Rashmi Gupta.
"Right now there’s so much fear and negative sentiment that people are not distinguishing opportunities at a granular level," said Gupta, who runs J.P. Morgan Private Bank’s $700 million Emerging Markets Growth & Income Strategy from New York. "You’re not getting enough people drilling down to individual sectors and countries and finding the right opportunities."
The comments come after emerging-market equities tumbled 17 percent this year as currencies from Argentina to Turkey cratered and trade tumult between the U.S. and nations from China to Mexico stoked uneasiness in emerging-market investors. Gupta’s top picks include Brazil, Russia and Mexico, with part of her approach based on a simple strategy -- checking out who’s in charge of a country’s monetary policy.
Find out "whether they’re independent, prudent and engaged in the right monetary policy," Gupta said. "If you had that lens, you would have been cautious on a place like Turkey."
Here’s what else Gupta says:
What attracts you to Brazil and Russia?
- Brazil has a current account surplus and has exited a deep recession, leaving room for earnings growth and for confidence to pick up
- Presidential election could present opportunity for the market, but "anyone who isn’t committed to pension reforms or orthodox economic policy would be a major step backwards for Brazil" and depending on the winner, "we may have to reduce allocations"
- Four things that make Russia attractive: trades at a discount to EM, strong earnings growth upgrades, prudent and independent central bank head and being tied to oil
- "One of the reasons Russia trades inexpensive is the overhang of sanctions risk," she said. "As much as I like Russia I would tend to have smaller allocation than I would to a lot of other countries because you have to be careful on how you size the allocations to this market"
What other risks do you see for EM?
- Two things have driven weakness this year. The first thing is dollar strength, which really hurt emerging-market currencies and exposed the outliers like Turkey and Argentina. The second thing is concern about trade.
- Will need to see dollar weakness for EM to improve
- "I don’t think people fully appreciate China’s ability to cushion their economy from some of the trade impacts," she said. "I don’t think China has been given the credit they should be given for the policy levers that they have."
- The sentiment is as negative as it was in 2015, but in 2015, there were true concerns about global growth and recession; "I don’t think the world is in that place right now, but the fear is the same."
What about the Fed’s rate hikes?
- Less concerned about rate rises than dollar appreciation; a dollar spike is much more disruptive to EM than the Fed raising at a steady pace
- If you have an environment of decent global growth, markets can withstand it
- In 2004-2006, the Fed raised rates rapidly, and equity markets gave really strong returns; the fear is if the fed raises rates too quickly in an environment when growth is weak
Are you overweight China?
- "We’re actually underweight China," because although its weight in the index is large, there are many other opportunities in EM
- We have a more positive view on China’s ability to cushion themselves than many people do in the market right now, but from a portfolio construction perspective, I think it’s better to have opportunities throughout -- India, Russia, Brazil, China, Mexico, Chile, etc.
- Added to Mexico in August; saw opportunity to add historically expensive market at depressed valuations
What about India?
- Overweight; "If there’s one country that has made true reforms, it’s India"
- Recently it’s weakened quite a bit, but it’s a very domestically-driven economy, and the fastest growing economy. This could actually open up the opportunity to enter a historically expensive market.
- "If you have a longer-term view, adding to India on dips has typically been a good move and that’s something we’re looking at right now."
- We are very conscious of currency risk so that’s one of the things we’ll have to work through before thinking about adding.
What countries are you most cautious about?
- Has been cautious about Argentina and Turkey for a while
- You can find stock-specific opportunities in almost any country; has a little exposure to Turkey, but "I wouldn’t be adding to Turkey right now."
- "For us to be overweight a country, they need to have a prudent and independent central bank," she said. "That doesn’t mean we wouldn’t allocate, but for medium to long term horizon that’s important to us"
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