As emerging market concerns contributed to the global equity-market correction this week, some emerging-market companies appear worth buying at a discounted price, William Blair said in a research note.
Global markets shuddered this week led by slowing and possibly overestimated growth in China. The Shanghai Composite Index fell 12.5% in August, and on Tuesday the country’s manufacturing purchasing managers index declined to a three-year low.
In addition, concerns about weakness in China reverberating to its trading partners, a possible interest rate hike in the U.S. and foreign equity and bond outflows combined to adversely impact emerging markets, the paper said.
The IMF in July projected growth in emerging markets for 2015 to slow to 4.2% from 4.6% in 2014, revised down from 4.3% projected in April. The organization also cited depressed commodity prices, geopolitical factors and structural bottlenecks as reasons for the slowdown.
Economic forces have sent the iShares MSCI Emerging Markets ETF (EEM, Financial) down 17% year to date, versus a 6.3% gain for the MSCI World Index ETF (TSE:XWD, Financial), which tracks developed markets. Emerging markets have reversed from their direction earlier this year as the worst-performing category of indices to date, William Blair’s data showed. The group posted a gain of almost 5% in the first half of the year, followed by an almost 20% drop from July 1 to Aug. 24. China showed the most disparate performance, gaining roughly 15% before a more than 20% drop for the same periods.
Emerging markets are also trading at lower valuations than developed market companies. The MSCI Emerging Markets Index has a 12-month forward P/E ration of 9.4 for the, while the MSCI World Index has a forward P/E of 13.9.
Though investors remain concerned about slower growth and negative earnings revisions in emerging markets, high quality companies with good earnings prospects still exist in emerging markets.
“These companies have strong competitive advantages over their peers, and/or are exporters, benefiting from weak local currencies and strong end-market currencies. Given the recent broad market sell-off, we are opportunistically adding emerging-market stocks to portfolios where corporate quality is high and valuations are supportive,” the firm said.
Characteristics the managers were looking for were market leadership, good management, significant financial flexibility and the ability to “capitalize on weak market share and outpace weaker competitors.”
“Indiscriminate stock market declines provide great opportunities for active managers to buy high quality companies at lower prices, and that is our focus. At this point, we view this summer swoon as a typical cyclical market correction following many years of equity-market strength,” they added.
The GuruFocus screener reveals some emerging market stocks near the criteria listed above worth researching. The companies following companies have financial strength rated between 4 and 10, are the top 20 most predictable, the 20 with the highest five-year growth rate, and are trading less than 10% higher than their 52-week low price:
New Oriental Education & Technology Group Inc. (EDU, Financial), Ultrapar Participacoes SA (UGP, Financial), Tianshui Huatian Technology Co. Ltd. (SZSE:002185, Financial), Beijing Dhc Digital Technology Co. Ltd. (SZSE:002065, Financial) and Changchun High & New Technology Industries (SZSE:000661).
The emerging markets stocks owned by the most gurus are: Baidu Inc. (BIDU), America Movil SAB de CV (AMX), Cemex SAB de CV (CX) and Ctrip.com International Ltd. (CTRP).
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