Description: At Milltrust, we have developed proprietary geographical asset allocation models that help drive the country allocation recommendations for our equity investment solutions. The models are based on a scoring mechanism that compares and evaluates the attractiveness of each country using quantitative investment factors that have been shown to convey information about future equity returns. This allows us to tilt the portfolios towards the countries and regions that provide a more favourable environment with the goal of enhancing dollar returns of unhedged global equity portfolios. This is a systematic process.
Strategy: Milltrust Global Emerging Markets Equity Strategy
Investment Universe (core – 10 countries): China, Taiwan, India, South Korea, Thailand, Malaysia, Indonesia, Brazil, Russia and South Africa.
Summary: There has been some movement in the rankings for the upcoming quarter with South Africa moving to an overweight as valuations reach very attractive levels. Other movers include China moving up to neutral as the economy proves to be increasingly resilient, Brazil dropping down slightly from an overweight position due to their expensive valuations and Indonesia becoming an underweight as it falls into the value trap category with poor growth and momentum indicators. We continue to view Russia, South Korea and Taiwan as the best country bets.
Russia remains the top ranked country in our model with the double benefit of offering attractive valuations and high dividends; the year-on-year price momentum is also still positive. South Korea is another overweight and has been resilient from a growth perspective with growth forecasts for 2021 improving 70 bps over the last six months; Year-on-year price momentum remains positive, the currency is undervalued and the terms of trade is trending up. Meanwhile, South Africa has seen its growth forecasts increase 140 basis points for 2021 supported by an improving terms-of-trade trend while offering attractive valuations with its current forecasted P/E ratio below both the EM average and its own 10-year average. The rand is also undervalued in real terms. Finally, Taiwan’s attractiveness is boosted by their positive price momentum and favourable risk indicators including a substantial current account surplus relative to GDP.
Similar to South Korea, China’s economy is rebounding faster than others with GDP growth forecasts increasing 230 bps for 2021; however, monetary conditions are still relatively tight with loosening action by the authorities slower than other EM countries. Brazil has fallen down the rankings to a more neutral allocation mainly due to expensive valuations; its forecasted 2020 PE ratio is above the overall EM average and its own long-term average. On the other hand, the Brazilian Real continues to be extremely undervalued and monetary policy becomes increasingly accommodating. Finally, Malaysia has been bringing down interest rates in line with the EM average and still has relatively high real interest rates to work with. The risk factors are also favourable for the country which has healthy external balances.
India’s domestic growth has been more resilient in 2020 but there are concerns over 2021 growth as forecasts drop below the EM average. India’s forecasted 2020 PE ratio is in line with EM average, but price momentum is still negative. On the positive side, India’s monetary policy has been increasingly accommodating with interest rates now below the one-year average and high real rates still offering room to manoeuvre. Indonesia is offering attractive valuations versus its long-term average but negative price momentum and weakening growth forecasts for 2020 and 2021 point to a value trap. Meanwhile, in Thailand, negative price momentum and still expensive valuations are outweighing a recent drop in interest rates and an improvement in growth forecasts for 2021.
Ranked from most attractive to least attractive.