September 2016

Emerging Market equities have bounced back in 2016 after five years of disappointing returns.
Today, investors face stretched valuations in the U.S. and other developed economies as growth
around the world has become more difficult to find. We maintain that an allocation to Emerging
Market equities can help bridge the return gap in a low yield, modest return environment and
ultimately improve investor outcomes. With that in mind, we asked Westwood International
Advisors’ (WIA) Emerging Markets Portfolio Manager, Patricia Perez-Coutts, to share her insights on the
current state of Emerging Markets and where opportunities exist in this unique environment.

Coming off a disappointing five years for Emerging Market stocks, what has driven the bounceback in 2016?
In the past four years, there have been two marked episodes (in 2013 and 2015) of underperformance, stemming from extreme
currency volatility. Additionally, sentiment turned very negative against Emerging Markets on issues arising from external factorssuch as removal of Quantitative Easing (QE), weak global growth, a strong U.S. dollar and volatility in oil markets. That sentiment,coupled with Emerging Market specific factors including weaker, but-still-positive GDP growth, a decline in the commodity cycleand resulting adjustment of fiscal and/or current accounts put pressure on the asset class. Additional pressure came from earnings impacts as a result of the downturn. The resurgence of the asset class can largely be attributed to the realization that fundamentals in Emerging Market economies are now much more stable and that growth has begun to pick up. More importantly, currencies have not only stabilized but also strengthened as their relative valuations became extremely cheap, given the fundamental picture. Additionally, monetary policies across Emerging Markets have entered a more stimulative cycle and no longer remain as vulnerable to U.S. Federal Reserve monetary policy.

In particular, specific countries have had major milestones in their economic evolution. For instance, India’s Gross Domestic Product (GDP) is growing at roughly 7.5%, while an infrastructure build-out plan is also gaining traction. China has been stimulating its economy and has achieved stability in its main economic metrics. Brazil has dealt with its political issues and has started to show better economic results. In addition, Indonesia and Thailand have both fostered productive investments in their economies.

Investing during periods of underperformance in Emerging Markets equities has been rewarded over the long term.

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What catalysts will drive growth going forward in Emerging Markets?
Catalysts that will potentially drive future outperformance in Emerging Markets include relatively stronger GDP growth, fiscal
discipline, monetary and fiscal policy stimulus and less volatility, in general. We believe Emerging Market economies are currently fundamentally superior to developed economies while trading around a 15% Price to Earnings (P/E) discount on a sector-adjusted basis relative to Developed Market equities. For us in particular, the observation of a continuation of earnings growth for Emerging Market companies is what matters most and ultimately their achievement of returns in excess of their cost of equity.

How do you see Central Bank policies around the globe impacting the asset class?

It is our belief that overall monetary policy stimulus around the world will continue for a while longer and assuming these policies are able to show the desired effects (renewed growth and inflation), they will generally be supportive of equity valuations. If the issue of pervasive deflationary tendencies continues, equity markets, especially those in developed markets, will in all likelihood turn negative. Given that most Emerging Market economies are not in a deflationary trend, they should enjoy relative benefits coming from all of the stimulus activity.
What type of investment approach do you believe is best suited to take advantage of the inefficiencies of the Emerging Markets asset class?

We believe a patient, actively managed approach focused on strong and high-quality business models is what has and will continue to achieve the best results in Emerging Markets in the long term. By virtue of their own economic evolution, Emerging Markets offer one of the most compelling investment opportunities among various asset classes. But most importantly, companies in Emerging Markets that overcome the vast array of intricacies and achieve returns in excess of their cost of doing business, in the long run will ultimately be rewarded by the marketplace.

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Summary
At Westwood Trust, we believe Emerging Market equities are a viable option to help investors, who are seeking reasonably priced growth opportunities in their portfolios, bridge the return gap left by the current low yield, modest return environment. If this is a strategy that you would like to explore, we would be happy to discuss whether it makes sense for your personal financial situation.
Thank you for the continued confidence you place in Westwood Trust.

 

For more information, please contact:
Dallas: Randy Root at 214.756.6900 or rroot@westwoodgroup.com
Houston: Bill Cunningham at 713.683.7070 or wcunningham@westwoodgroup.com
Omaha: Art Burtscher at 402.393.1300 or aburtscher@westwoodgroup.com
Newsletters can be found by visiting westwoodgroup.com.

 

The information contained herein represents the views of Westwood Holdings Group, Inc. at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy or completeness of any data compiled herein. Any statements non-factual in nature constitute only current opinion, which is subject to change. Any statements concerning financial market trends are based on current market conditions, which will fluctuate. Past performance is not indicative of future results. All information provided herein is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, orrecommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned.