Emerging market equities and bonds have reached such distressed valuations that they now present a buying opportunity for investors, according to Kames Capital’s Chief Investment Officer Stephen Jones (pictured).
While the group has been underweight emerging markets for the majority of 2015 because of the headwinds facing the asset class, Jones says the company’s funds had been increasing their exposure back to a neutral position in recent weeks.
“The valuations on emerging market equities have got to a point where they now look attractive,” he says. “Emerging markets have become distressed in terms of their prices, and while the headwinds from a strong US dollar and slowing global growth remain, the bad news is largely in the price now.
“A neutral position on emerging market equities is the sensible place to be in Q4 and then investors need to reassess next year, taking into account data from the US which will dictate when interest rates rise.”
As well as increasing its exposure to emerging market equities, Kames’ has also become more positive on hard currency emerging market debt.
“In a similar vein, spreads on some of the hard currency bonds have become too attractive to ignore, and so there has been an opportunity to increase our exposure there. Being underweight at these levels is too expensive now.”
Jones says with US growth slowing, it may mean that interest rates remain lower for even longer. Therefore, equities in general look attractive, especially after the recent pullback across most markets.
“We are overweight equities as a house, as valuations are now at more attractive levels. Companies that can deliver earnings will continue to be rewarded,” he says. “However, this is a stock pickers market, and in the current environment investors need to be more discerning about what they hold, as falls of between 10-20% for individual companies delivering disappointing news are becoming more common.”
Jones says as well as increasing allocations to emerging markets, equity investors would be minded to look to Europe for opportunities as valuations on the continent look compelling.
“With quantitative easing continuing in Europe and growth offering the potential to surprise on the upside, it looks like one of the most attractive regions to invest in,” he says.