Bargain Hunters Turn to Emerging Market Stocks

“If you can buy a well-diversified equity portfolio with a P/E of 10, you’re getting an awful lot of earnings for each dollar of price you’re paying,” said Chris Brightman, chief investment officer for the asset management firm Research Affiliates.

Arjun Jayaraman, head of quantitative research and a portfolio manager at Causeway Capital Management, says emerging market value stocks are the only major asset class trading at a discount to their pre-global-financial-crisis levels. This explains why many value investors think these stocks will outperform in the coming years.

The asset management firm GMO, for example, forecasts that over the next seven years, emerging market equities in general will gain only 2 percent a year on an inflation-adjusted basis but value stocks will return nearly 7 percent annually.

There are risks, though, to the strategy of emphasizing value stocks in emerging markets. “When most people think about the demographic trends driving the emerging markets and the high growth rates of India and parts of China, these things are all favorable to growth” stocks, Mr. Jayaraman said — but not necessarily to value-oriented shares.

But, he says, “The rubber band can only stretch so far” when it comes to the rising prices of growth stocks.

Ernest C. Yeung, manager of the T. Rowe Price Emerging Markets Value Stock Fund, notes that in the low-inflation, low-interest-rate climate that much of the emerging markets have been mired in recently — where investors worry that growth will be hard to come by — “people are willing to pay up for future growth.”

“That’s why in this environment, high-quality growth stocks — names like Tencent and Alibaba — have done so well,” he said. But that should start to shift, he said. “When the macroeconomy recovers, value stocks normally begin to work.”

In particular, value stocks in the financial industry stand to benefit.

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