I have already the rough workings of a plan for scooping up bargain investments in 2016. Yes, I know, it’s a bit early for annual predictions, but the opportunist radar is already flashing. In a nutshell, emerging markets are already dirt cheap and could be about to get cheaper. With that in mind, I am poised to cherry-pick certain stock markets.
First, the cheap bit.
Developing markets have performed worse than developed markets, leaving prices unusually low.
There’s solid evidence of this, if you turn to a neat calculation known as “Cape”. This compares prices to profits, like the common prices to earnings ratio, but smoothed over a decade to iron out anomalies. This, in the jargon, is the cyclically adjusted price to earnings ratio, hence Cape.
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The lower the number, the higher the future returns, history tells us. StarCapital, a German asset manager, crunches the numbers each month and the latest figures tell a simple story.
Emerging markets were found to be 37pc below fair value. The US stock market was estimated to be 25pc too high. These numbers indicate that, based on what’s happened before, annual returns will be 3.6pc for the next 15 years in America, versus an impressive 7.9pc for emerging markets.
So we should all rush to buy? I believe a better opportunity may lie around the corner. You may have noticed the numerous headlines warning of impending disaster for emerging markets. This is because the imbalances in the world economy mean company debt has a ballooned in some emerging markets, which will pose a problem when interest rates in the US begin to rise.
Rather than take this as a negative, it tells me an even better chance to buy on fears will emerge. Market panic provides a perfect hunting territory for the opportunist.
Expected stock market returns for different regions over the next 15 years
Source: StarCapital, based on CAPE valuations
| Region |
Future returns |
|---|---|
| Emerging markets |
7.9% |
| Europe |
7.1% |
| World |
5.3% |
| US |
3.6% |
So what to buy?
The cheapest countries, by Cape, are either those I have a decent amount already invested in – such as Brazil – or ones that I wouldn’t touch if it was the cheapest stock market on earth – Russia (and it is).
I’m also considering this debt issue, so the hunt turns to frontier markets, for a country with the ingredients to transform its fortunes but today has reasonably low debts.
One country full of promise is the Philippines. It has been on my radar for several years. Its population of 98 million is young and skilled. A widening band of consumers will emerge as the government continues to push through reforms.
Infrastructure spending as a percentage of GDP has doubled in six years but at the same time, debt to GDP has fallen from 80pc to 45pc, lower than 88pc for the UK or 74pc for Germany. The country also has low company debt, at 39pc of GDP, World Bank data shows. For Britain, it is 141pc.
How to invest?
The Alquity Asia fund takes bold bets. This makes it riskier than traditional rivals but also means that when China’s slump dragged down other Asia funds, Alquity’s was less affected.
It has devised a “Super Seven” list of stock markets in Asia in which it has invested (we’ll explore this more in coming weeks). It holds 40pc of money in frontier markets, including a 4pc speculative bet on Burma. That’s too far up the risk spectrum even for this opportunist.
The Philippines is the fourth largest holding with 9pc invested. The Alquity fund is an option. A country focused tracker, the DB X‑Trackers MSCI Philippines ETF fund (performance chart below), is a more precise way to invest.
For now, this market is still 20pc too high on the Cape measure but I’ll wait, patiently, for the right opportunity.
andrew.oxlade@telegraph.co.uk
Five-year performance of the DB X-Trackers DBX MSCI Philippines ETF
Telegraph Investor: DBX Philippines ETF interactive charts
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