Where to Find Value Opportunities Within Emerging Markets

India has consistently been one of the most expensive countries in our emerging markets universe, boasting a larger number of high-quality companies with strong structural growth. However, over the past year, it has become even more expensive. In our view, India deserves to trade at a premium, but the high valuations and elevated expectations remind us to be particularly vigilant and disciplined regarding valuation levels.

The most overvalued areas are the small- and mid-cap segments of the Indian equity market, as well as companies in sectors more sensitive to government actions. However, it is still possible to find reasonably valued companies. Additionally, we see significant differences in valuation depending on the sector, and even among specific companies. In particular, we find relative value opportunities in the financial, technology services, and pharmaceutical sectors, all of which exhibit high-quality operations and management.

In Southeast Asia, Vietnam has faced challenges in recent years due to a deteriorating real estate market and a sudden liquidity shortage caused by anti-corruption measures and regulatory reforms in the corporate bond market. The market is volatile and has been revalued, requiring caution from foreign investors. However, from a valuation perspective, Vietnam is appealing. In the first half of 2024, Vietnam recorded a year-on-year GDP growth of 6.4%, demonstrating solid economic performance. The country serves as an important outsourcing hub for the Asian region, benefiting from recent supply chain shifts. Vietnam is becoming a new manufacturing center, attracting increasing foreign investment from international companies like Apple, Samsung, and Intel. The shift in supply chains from China to Vietnam is still focused on low-value-added production, such as final assembly, where Vietnam holds a competitive edge due to lower labor costs.

In our opinion, Indonesia also offers solid investment potential as one of the strongest and fastest-growing economies, not only in Southeast Asia but across the entire emerging markets region. It boasts a diversified economy and substantial wealth in natural resources such as coal, nickel, and copper. Both domestic consumption (53% of GDP) and exports of commodity-related products are contributing to a robust current account balance. At the same time, Indonesia is undergoing a political transition, raising some fiscal concerns, which has led to widespread sell-offs, making the market more attractive to value investors like us.

Finally, one of the markets that has lost favor with investors in recent years is South Africa. However, following surprising results in recent elections, which have led to the formation of a new national unity government, the country’s fundamentals are improving. Investor positioning is also low, which could present opportunities for value investors. As the country overcomes its energy problems and the quality of its companies improves, South Africa is becoming an interesting market once again.

As long-term equity investors, we understand the need to be selective and recognize that the world is constantly changing. Our analysis highlights that the quality of management can make a significant difference in company outcomes and their ability to navigate challenging market environments. Therefore, evaluating the management teams of the companies in our investment universe is a crucial part of our investment process, alongside our focus on companies with sustainable business practices that can generate long-term returns.

Opinion piece by Laurence Bensafi, portfolio manager and deputy head of the emerging markets equity team at RBC BlueBay Asset Management.

• Emerging Markets
• India