The processing of sugar cane is an important economic activity on the African continent Photo: pixelfusion3d Source: iStock

There still exist true value opportunities

Author: Axel Krohne

For many investors, emerging markets are synonym to higher risks and significant volatility. This only applies to a few exceptions, however, says Axel Krohne, sub-advisor of the AvH Emerging Markets Fonds UI (DE000A1145G6/DE000A1145F8) . In an interview with Universal-Investment, he explains how he successfully identifies undervalued emerging market stocks for the portfolio.

Axel Krohne, sub-advisor of the AvH Emerging Markets Fonds UI Source: EM Value

Universal-Investment: Mr Krohne, why is value such a crucial stock selection criterion for you?

Krohne: We prefer to buy undervalued rather than overvalued stocks. We take our picks wherever we unearth companies with solid long-term earnings prospects that trade at low valuations. These types of stocks are much more frequent in the emerging and frontier markets than in the Western world. Since the emerging and frontier markets are not yet overbought, investors can find significantly more substance for their money. The value approach is not about making money fast. Importantly, the strategy must mitigate risks in the portfolio to prepare it for any type of market environment.

Universal-Investment: According to which criteria do you select appropriate companies for the portfolio?

Krohne: Our pre-screening typically eliminates stocks from cyclical sectors. We favour companies with stable profits. Interesting propositions come for instance from the service sector, i.e. companies that cater to the needs of the growing middle-class that develops in almost all emerging markets. The prospects of these companies can often be deducted by simply looking at their historic performance and balance sheets. However I also like to meet in person with the management and see for myself what is happening on site. That is why I visit many portfolio candidates throughout the year. Critically, we must also be able to acquire the shares of these companies at a good price. It frequently helps if a market or region is out of favour with investors. You can buy any number of value gems under these circumstances.

Universal-Investment: Many investors have reservations about emerging market stocks because they fear higher volatility. What speaks in favour of financial exposure to the emerging markets?

On the whole, people are mistaken to believe that the emerging markets are more volatile.

Axel Krohne

Krohne: There are a few exceptions, but on the whole people are mistaken to believe that the emerging markets are more volatile. However this misconception has been around for years, even among professionals. The emerging markets are reflexively categorised as higher risk investments. Conversely, ten years ago during the emerging market hype, investors raved about the exciting growth rates in the emerging markets, their competitiveness, catch up potential and demographic trends and simply ignored the risks. Today, nobody sees the positive factors any more even though they are, of course, still very much in existence and a driving force of the economies. It will take years before the emerging markets will fully reappear on people’s radar screen. That is why investors will do well to take exposure to the emerging markets now well in advance of the next big run.

Universal-Investment: Which individual stocks have done particularly well in your portfolio recently?

Krohne: One of our most successful recent positions has been Dangote Sugar from Nigeria. We bought this stock in March and it has already gained 140 percent since. Last year, Nigeria had to accept a strong currency devaluation that also pushed prices significantly lower in the stock market and enabled us to acquire Dangote Sugar at a knock-down price. The company is very solid and has been consistently generating profits for years. We are also very happy with STI Education Systems, an education provider that operates over 70 schools in the Philippines. We only bought this stock some weeks ago and it has already gained well in excess of 12 percent.

 

Author: Axel Krohne
Date of issue: 11/3/2017