October 8, 2018 / 11:05 AM / 2 months ago

RPT-ANALYSIS-Emerging market stocks' descent to 17 month lows entices U.S. investors

 (Repeats without change)
    * U.S. vs Emerging Markets stock valuations tmsnrt.rs/2BWwo16
    * Select EM stock benchmarks performance year to date tmsnrt.rs/2zTPbZm
    * Select EM currencies performance year to date tmsnrt.rs/2Mh3iA9

    By David Randall and Rodrigo Campos
    NEW YORK, Oct 7 (Reuters) - The steep decline in emerging
market stocks since early this year are attracting some U.S.
fund managers who think they may find long-term bargains amid
the sell-off.
    Portfolio managers from Harding Loevner, Federated
Investors, and Wells Fargo are among those who have been adding
emerging markets stocks to their portfolios in the face of the
imposition of import tariffs by President Trump and rising
interest rates in the U.S.
    Emerging market asset prices have been hit hard this year.
The MSCI index of emerging market stocks closed Friday
at its lowest since May 2017 and it is down about 21 percent
from January's high. An MSCI index of emerging market currencies
 is down 8 percent from its 2018 high, hit in
March.
    On Thursday, JPMorgan cut its rating on Chinese equities,
the largest weight on the benchmark index, to neutral from
overweight on expectations that a protracted trade war with the
United States will hurt the Asian giant's economy next year.
    Yet some U.S. international and global fund managers say
that emerging markets offer better deals than the U.S. market,
where stocks continue to hit record highs. 
    "We're finding opportunities because of the trade war," said
Chris Mack, a portfolio manager of the Harding Loevner Global
Equity fund. 
    U.S. President Donald Trump has slapped tariffs on more than
half of the $500 billion the U.S. imports from China yearly, for
which Beijing has retaliated.
    Investor concern about the impact of the trade war has sent
stocks in China and other emerging markets sharply lower this
year. 
    Mack's fund has its highest weighting in emerging market
stocks since 2006 and its lowest in the U.S. since the same year
in search of better values, he said.
    The fund sold its position in Google's parent Alphabet Inc
 and bought South Korea's Samsung Electronics
. Investors pay more than $25 for every $1 in
earnings expected over the next 12 months at Alphabet, while
they pay just over $6 at Samsung according to forward
price-to-earnings estimates.
    "You're getting the benefits of a company that is being
boosted by a secular trend at a much cheaper price," Mack said.
 
    Brian Jacobsen, senior investment strategist at Wells Fargo
Asset Management, said his firm recently upgraded its stance on
emerging markets from negative to neutral. The reasoning behind
the move included compelling valuations and the likelihood the
trade tariffs will not hurt emerging market companies as much as
the broad market expects. 
    "People are slow to come around to the realization that the
U.S. isn't going to close its borders to all emerging markets,"
he said, adding that Vietnamese companies could stand to benefit
if the U.S. and China continue to slap tariffs on each other's
goods.
    Overall, U.S. global funds have nearly 7 percent of their
portfolios in emerging market stocks, a 25 percent increase from
3 years ago, according to Lipper, a Refinitiv company.
    Yet this year the $58.1 billion Vanguard FTSE Emerging
Markets ETF is down almost 15 percent and posted about $2
billion in outflows since July, according to Lipper. It closed
on Friday at its lowest since March 2017.
    However, there are signs the tide could already be turning. 
    Investors pumped money into emerging market equities and
debt at the fastest weekly rate since April, a Bank of America
Merrill Lynch analysis of EPFR data showed on Friday.

    "I've never seen sentiment (on emerging market equities) be
so negative when fundamentals are actually pretty good," said
Teresa Barger, co-founder and CEO at hedge fund Cartica
Management.
    "When you get a situation like this, what you usually see is
the retail investors getting scared and exiting but
institutional investors entering."
    Barger is looking beyond China to India and Brazil, both of
which may be less affected by the U.S. trade tariffs, she said. 
    Yousef Abbasi, global market strategist at INTL FCStone in
New York, also sees a silver lining for emerging market
countries outside of China if the Washington-Beijing trade war
intensifies, pointing to Brazil and Indonesia.
    "I'd be very selective in where I look for my exposure in
emerging markets," he said.
    "Look for countries with a large U.S. dollar reserve, direct
trade partners with the U.S. and that have (relatively) less
exposure in terms of exports to China."

    
 (Reporting by Rodrigo Campos and David Randall; Editing by
Christian Plumb and Daniel Bases)
  
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