Widespread Emerging Market Opportunities

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Allison Fisch, Partner and Portfolio Manager at Pzena Investment Management.

We are classic value investors. We will go in the emerging world, wherever valuation points us. That said, what’s particularly exciting about today’s environment is that valuation opportunities are very widespread. When I look at the different geographies that we have the ability to invest in, it’s a very wide set today.

The largest exposures in our portfolio are to emerging Asia, and in particular China and Korea. That said, we happen to be underweight China at the moment, though we are overweight to Korea.
Regionally, relative to most indices, we’re overweight to emerging Europe. Now, sort of no big surprise there because Europe itself is relatively cheap when you look around the globe.

But although I’m speaking regionally, the reality is, is that today it’s not as if there’s only one or two countries where we’re finding all of our opportunities. The different types of fear in the market, and the different uncertainties to business models and the ideas around disruption and the reverse of globalization, have really driven us to be able to find interesting valuation opportunities across a number of geographies, including places where we had never even invested in the past.

That’s really what differentiates the environment that we’re sitting in today, versus another time when valuation spreads were extremely wide in emerging markets. Three years ago, back at the end of 2015, the beginning of 2016, when the opportunities were much more concentrated in highly cyclical areas, like commodities and materials. Today, we see opportunity across a lot of different industries and a lot of different geographies, which is very exciting for the research team.

Beyond our largest absolute exposures to Asia, and our biggest relative overweight to emerging Europe, we happen to be underweight Latin America. This is an area that a lot of clients have been asking about recently. There’s a lot of excitement in Brazil in particular, with the new political regime and hopes of pension reform and privatization.
We have been making some adjustments to our Brazilian exposure over the last several months. A lot of that is because the companies that we own there have performed very well, in light of the political change, and have gotten too expensive to own in our portfolio.

That’s one of the issues around being a value investor is, we always must stick to our discipline, and sometimes the excitement around what’s happening in a particular industry, or a particular geography, can cause the valuation to get ahead of the fundamental. So we are seeing some of that in Brazil, although we do have exposures that we’re still excited about there.
That said, Brazil is the only country within Latin America where we have exposure currently, and it’s not as if we don’t like the fundamental stories of a lot of the businesses that operate in that part of the world, it really just comes down to valuation and what we’re finding popping up for us in the cheapest portion of the universe, which is where we like to hunt for our investment ideas.