Swedbank Research - Swedbank Research 3 February, 217 Emerging Markets Equity Strategy Relative Valuation Important for Country Allocation Relative valuation important for tactical country allocation Simple relative valuations such as PE-ratio is very useful Stay overweighted Korea, Taiwan and underweighted China, Brazil, Mexico and EM. Using valuation for country allocation in Emerging Markets Country relative valuation is important and a great input for country allocation in the Emerging Markets (EM) universe. We have tested the historical relationship of relative country valuation and excess return during 4 216. We have used 14 EM countries in our calculation and conclude that relative valuation is useful, even if we just use a simple valuation ratio such as PE-ratio. 7 1. Emerging Markets and Country Value Portfolio 6 4 6 8 21 212 214 216 EM: Country Value Portfolio EM (Equally Weighted) Source: Bloomberg, Factset, Swedbank Research Chart above show return in USD of EM (equally weighted of 14 countries in our research) and relative value weighted portfolio. Outperformance of value investing is robust over time and is a useful variable in our EM country allocation analysis. Mikael Wik Swedbank Research +46 8 5859 2286 mikael.wik@swedbank.se Please see important disclosures at the end of this document Page 1 of 5
Valuation: Country Allocation In our research of how valuation matters to country allocation within EM, we have used 14 countries during 4-216. We have used countries classified as emerging and with solid valuation data from 4. Countries in our research are Brazil, Chile, China, India, Indonesia, Korea, Malaysia, Mexico, Philippines, Poland, South Africa, Taiwan, Thailand and Turkey. We have used PE-ratio and calculated relative valuation for each country over 13 years: 7 2. EM: Value Portfolio 6 4 6 8 21 212 214 216 EM: Value Portfolio EM (Equally Weighted) We have ranked all countries and created two value based portfolios: 1. Value Portfolio. All countries are included and weighted based on their relative valuation. Country with highest valuation is weighted.95%, second highest 1.9% up to the lowest valuation country with a weight of 13.3%. 2. Low-High Portfolio. Short the 3 countries with highest valuation and long the 3 countries with lowest valuation. Our value weighted portfolio outperformed the equally weighted EM portfolio by over 13 % during 4 to 216 in (chart 2). During the same period, go long the 3 lowest valued markets and short the 3 highest valued markets have gained almost % (chart 3). Both chart 2 and 3 show in-sample calculations. Our calculations shows valuations as input in country allocation is robust also out-ofsample (chart 4). All performance data is in USD. 8 3. EM: Low - High Valuation 7 6 4 6 8 21 212 214 216 EM: Low - High Valuation 4. EM: Low - High Valuation (Out-of-Sample) 25 15 5 8 21 212 214 216 EM: Low - High Valuation Using relative valuation is robust over time and very Source: Bloomberg, Factset, Swedbank Research useful for country allocation. The relative simple valuation ratio such as PE-ratio is robust over time and also out-of-sample (chart 4). Please see important disclosures at the end of this document Page 2 of 5
Current Valuation Matrix Absolute Valuation Relative Valuation Country PE Forw ard PE Div Yield Total PE Forw ard PE Div Yield Total Emerging Markets High High High High Brazil Very High Very High Very High Very High Very High Very High Very High Very High Chile Low Low Low Low Very Low Very Low Very Low Very Low China Neutral Neutral Very High High Neutral Neutral Very High Neutral Colombia Low Low Very High Neutral Very Low Low High Neutral Czech Republic Neutral Neutral Neutral Neutral Low Neutral Low Neutral Egypt High High Very High Very High High High Very High High Greece Neutral Neutral Low Neutral Neutral Neutral Very Low Neutral Hungary Neutral Very High Very High High Neutral High High Neutral India Neutral Neutral Neutral Neutral Neutral Neutral Very Low Neutral Indonesia Very High Very High Very High Very High Neutral Neutral Neutral Neutral Korea Neutral Neutral Neutral Neutral Low Low Neutral Low Malaysia Neutral Very High Very High High Low Neutral Neutral Neutral Mexico High High Low Neutral Neutral Neutral Low Neutral Peru High Neutral Very High High Neutral Neutral Very High Neutral Philippines Neutral Neutral Very High High Neutral Neutral Very High Neutral Poland High Neutral Very High High Neutral Neutral Very High Neutral Qatar High High Very High High Low Neutral High Neutral Russia Neutral Neutral Neutral Neutral Neutral Neutral Low Neutral South Africa Very High High High High Neutral Neutral Neutral Neutral Taiw an Neutral Neutral Low Neutral Very Low Low Very Low Low Thailand Very High Very High Very High Very High High Very High High High Turkey Low Low Neutral Low Low Very Low Low Low United Arab Emirates Neutral Neutral Low Neutral Neutral Neutral Very Low Low Source: Factset, Sw edbank Research. Very high/low : 15% highest/low est compared to historical levels (from 4). High/low : 16-3% highest/low est compared to historical levels (from 4). UAE from 7, Colombia 9, Eqypt and Qatar 21. Please see important disclosures at the end of this document Page 3 of 5
Current Tactical Allocation Position Long US/Short EM Short China/Long EM Short Mexico/Long EM Short Brazil/Long EM Long Korea/Short EM Long Taiwan/Short EM Comment Valuation, momentum and banking sector favors developed markets (US). Vulnerable banking sector and high valuation. Mexican equities are overvalued. Too high expectations of future profitability and growth. Brazilian equities are overvalued Struggling economic outlook and high expected future earnings growth. Korean equities are relative undervalued Relative robust economy with financial stability and possible rebound in exports next year. Taiwan equities are absolute and relative undervalued. The economy will rebound and equity market will be supported by stronger export market. Please see important disclosures at the end of this document Page 4 of 5
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