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MILLTRUST INTERNATIONAL
 

EM manager rides on oil price rally

July 17, 2018

BY Milltrust International Group

by CityWire Asia, Shannon Wong 

Oil price is one of the main catalysts in emerging markets (EM) equities, according to Simon Hopkins, CEO at Milltrust International.

Oil prices are nearly double the level from early 2016 when the rally began and the Commodity Research Bureau (CRB) index is up about 25% as of July 6.

‘Our portfolio at the moment is unsurprisingly tilted towards oil and commodity exporters who are benefiting from the strong rally in commodity prices,’ he told Citywire Asia.

Higher oil price, however, will also negatively impact large EM economies that are net importers of oil and gas, such as China and India.

Nomura said in its report that a continued rise in oil prices would divide EM by economic performance due to two reasons.

First, EM countries feel the economic impact of higher oil prices much more than developed markets (DM) because of the size of their economies.

The majority of oil-producing and consuming countries are in EM, and they are more energy intensive and less energy-efficient than their DM counterparts.

Second, a rise in oil prices has an asymmetric impact on EM economies.

Nomura said the macroeconomic cost to large net oil importers with weak economic fundamentals can be disproportionately larger than the macroeconomic benefit to net oil exporters.

Nevertheless, big EM oil exporters, such as Latin America and the Middle East, are expected to reap a significant increase in commodity export revenues when oil prices rise.

Other catalysts in EM equities include short-term rate hikes, stronger dollar and the ongoing US-China trade war.

Cheap valuations

On a relative basis, EMs still offer stronger growth prospects and overall better value than developed markets.

Equity valuations in EMs look cheap by several different measures and the recent two-year rally has not changed this argument, according to Milltrust’s Hopkins.

The spread between the EMs stocks’ earnings yield and the 10-year US Treasuries has also widened significantly since January, from 3.4% to 4.8% as of July 6.

Hopkins said EM equities now offer the highest premium over US Treasures in over 21 months, which also provides a nice cushion to help withstand further tightening of US rates.

‘The prospect of an inverted yield curve does not send strong signals for a robust recovery, and we still see exceptional value for money in the EM space,’ he said.

Recent sell-off

Milltrust’s Hopkins said the recent sell-off that investors have seen is more a function of the typical volatility of the asset class rather than any downgrades in the fundamentals.

‘If you look at the last 15 years, losses of this degree are not uncommon, and most of them were followed by strong positive months where the losses were made up,’ he said.

He added: ‘The medium to long-term story is still incredibly compelling for the asset class and investors are still largely underweight so we expect demand to increase.’

It is also worth noting that investors are still heavily skewed towards high yield portfolios and the value for money in this arena still favours EM by a significant margin, Hopkins said.

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