Andres Garcia-Amaya is a macro research analyst for the Emerging Markets and Asia Pacific Equities team at J.P. Morgan Asset Management. He performs in-depth macro research on economies and markets that informs the team’s country and sector top-down views.
Prior to joining the Emerging Markets and Asia Pacific Equities team, Garcia-Amaya was a global markets strategist within the Global Market Insights Strategy team, where he was responsible for delivering timely market and economic insight to financial advisors globally. ETF.com recently caught up with Garcia-Amaya for his views on the latest developments in emerging markets.
ETF.com: Do you think the China slowdown fears are overblown?
Andres Garcia-Amaya: There's no doubt China's growth has been decelerating, but I'm skeptical of the majority view that we're headed for a hard landing.
The magnitude of the deceleration has been exaggerated. What we saw in August and September were extreme circumstances, where the hard-landing scenario became the base case for investors.
From that perspective, you don't actually need to get good data; you just need to get less bad data for the markets to rally. In the last couple of weeks, that's what we've been getting as the market has rebounded.
ETF.com: In your portfolios, do you tend to buy individual securities? ETFs?
Garcia-Amaya: We do buy individual securities. We keep the conversations to the sector or country level, but our investments are done at the stock level.
ETF.com: Would you be buying China stocks now?
Garcia-Amaya: For the top-down informed portfolios, China is one of our overweights. As valuation gets lower, it becomes more attractive for us, considering we don't see any structural change to the story. China is moving from an investment-heavy economy to a consumer-driven economy. That's going to take years, not quarters. But it's actually a healthier type of growth, although the level might not be as high as it used to be.
ETF.com: Another emerging market you said you liked was Russia. You talked about how the valuations are extremely attractive there. Can you tell us about that?
Garcia-Amaya: In Russia, the forward 12-month price/earnings ratio is actually lower than the dividend yield. The forward P/E is around 4.7 and the dividend yield is around 5 percent.
If you look at the emerging market universe, and you go back 25 years, this type of situation has only occurred 165 times. That's less than 0.1 percent of the time.
And when you look at the performance 12 months out after this type of situation happens, you have fairly robust returns, with an average 65 percent increase.
It's clearly a value call on Russia. We could sit here and debate all the wrong things that have gone on in Russia, including the fall in oil from $120 to sub-$50, the sanctions, the geopolitical uncertainty, etc. Having said that, at some point, valuations price in all that and more. We feel that's the case right now.
ETF.com: What's your take on the Brazil market, which has gotten hammered recently?
Garcia-Amaya: From an equity standpoint, it's too early to say Brazil's seen enough pain, because valuations are not necessarily at a deep discount. They're no longer expensive, but they're not cheap enough, considering the magnitude of the recession that Brazil's experiencing, as well as all the political gridlock that's occurring.
Having said that, the currency is looking appealing to us. Today [Oct. 15] it's at 3.82 to the dollar; a few sessions ago, it was closer to 4. Either way, we think that the risk/reward for the currency is looking more appealing now.
We use a few different metrics, but one of the main ones we use is the real effective exchange rate, looking at the last 10 years. We're in essence waiting for the reversion to the mean of where it usually trades. Using that methodology, there's 30 percent upside to what we consider to be the fair value.
ETF.com: Are there any other areas of value you see in the developing world? Indonesia is another emerging market that was hit this year.
Garcia-Amaya: Indonesia was one that was starting to screen well for us, with valuations starting to get attractive―not just on the equity side, but actually on the currency side.
You've got to remember, as a U.S. investor, you worry about a company's ability to generate earnings in local currency. But then you have to transfer those back to dollars, and so you have to worry about what the currency is going to do. From that perspective, Indonesia was looking more attractive.
Unfortunately, in the last few weeks, that opportunity set closed up because the market had a tremendous rally. In 12 sessions, it was up something like 22 percent. So that closed the valuation gap that was starting to look very attractive.
Right now for Indonesia, we're back to an environment where valuation looks attractive, but the risk is also heightened. It's not cheap enough to justify getting in solely based on valuation.
ETF.com: You talk about value and how we have to differentiate between these markets, but ultimately, I take it you don't see some sort of 1997/1998-style emerging markets crisis.
Garcia-Amaya: That's right. We don't see a crisis, but the reality is that growth is very slow, unusually slow for emerging markets. That's affecting earnings negatively. And unfortunately, the trend doesn't seem to be changing anytime soon. Therefore, valuations are probably going to stay attractive for quite a while until we start to see the fundamentals turn.
When I talk about fundamentals, we look at a couple things. One is relative economic growth, meaning emerging market growth relative to developed-market growth. Once that starts picking up, that could be the beginning of something much larger.
Secondly, we'll need to see earnings revisions start to turn positive. Analysts have been cutting estimates for well over four years and we have not seen that trend change. At some point, they'll throw in the towel and cut too much. Then they'll have to start raising estimates.
And then the last thing is currencies; we need to see currencies stabilize.
We need to see an improvement in these three fundamental points, but there's no evidence of that yet. There's nothing to suggest that this is the beginning of something much larger than just a bounce from very low valuations in August and September.
Editor’s note: ETFs related to Garcia-Amaya’s view are the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-53), the Market Vectors Russia ETF (RSX | B-71) and the WisdomTree Brazilian Real Strategy Fund (BZF | C-91).
Contact Sumit Roy at [email protected].