JOHCM's Syme avoids 'massive distortion' of emerging market equities
JO Hambro Emerging Markets Opportunities fund manager James Syme believes the emphasis on chasing dividends has created a “massive distortion” in emerging market equities and is looking elsewhere for opportunities for long-term growth.
Syme argues that opportunities to invest in firms with potential high returns, which can then be reinvested back into the company, are being lost in the continual chase for dividends.
He says: “I think there has been a massive distortion in emerging equity markets driven by dividends. If you have a stock with a 50 per cent payout ratio and a p/e of 20, this may look exciting from a bond perspective but for someone like me it’s hideously expensive.”
Syme prefers emerging markets that focus on long-term growth, most of which have consequently fallen out of favour with investors.
He says: “The markets we like are cheap and have low payout ratios. While we have seen huge inflows into bonds and equities in South East Asia, we would rather be in some of the larger markets with strong fundamentals where growth will continue to come through and our valuations are protected, if that foreign capital tide were to turn.”
Syme looks to Russia where he sees opportunities in companies with “decent returns on capital and good growth rates at cheap valuations”, through its domestic focus as an economy. The JO Hambro Emerging Markets Opportunities fund currently has a 7.5 per cent exposure to Russia.
He says: “Russia is largely unloved. It will be a slower burn, just because there is so much skepticism surrounding their politics. However the underpin of the economy is strong and this gives Russia a lot of ability to deal with stress.”
In an interview for Fundweb, Syme highlights that one of the biggest areas for growth is in emerging markets’ internet stocks.
The JO Hambro Emerging Markets Opportunities fund currently has holdings with a number of internet stocks including Baidu, Naspers, NHN, Yandex and e-commerce company Mercadolibre.
Syme says these internet stocks are currently getting cheaper and cheaper in what he describes as a ‘huge de-rating’, as a direct result of them being high growth companies that do not pay dividends. However he says they are expecting a ‘sharp re-rating’ on these stocks as a knock on from the US recovery which should see US yields go back up.