Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm speaking from the Morningstar Investment Conference in London where I'm joined by Matthew Vaight, Manager of the M&G Global Emerging Markets Fund.
Hello, Matthew.
Matthew Vaight: Hi.
Wall: So, we've had great returns from emerging markets over the last year. What has driven these great returns for shareholders?
Vaight: I think a lot of it is actually just underpinned by fundamentals. I've got a very strong view that it is profitability and earnings, cash flow that drive equity markets in the long-term. And what we saw over 2017 was 30%, 35% earnings growth from emerging markets coming from a low base from 2015 and 2016. And therefore, the equity market performance we saw of a similar amount was essentially just reflecting those fundamentals. So, unlike many other equity markets, we didn't see much of a re-rating of emerging markets over 2017. So, as long as those fundamentals continue, I actually think emerging markets still look quite interesting in terms of a potential investment opportunity.
Wall: Now, is this on a relative basis compared to developed market equities that look expensive? Or is this truly an exciting valuation proposition?
Vaight: I think it's truly an absolute valuation opportunity. What I'm seeing in terms of valuation multiples for the emerging market index are; we've got a low-teens P/E multiple, so a P/E multiple of 12, 13. There are no other indices on those multiples. On a price to-book-basis, we are about 1.7. Again, most other indices out there are over 2 if not over 3. So, I think, there is a very strong absolute valuation argument. But I do think relative comes into it as well. I do think there is material opportunity for capital to flow from bond markets or even expensive equity markets like the US into emerging markets because we now have this lovely combination of attractive valuations but also these strong improving fundamentals at the same time.
Wall: Now, emerging markets are a heterogeneous bunch. It would be untrue to say that all fundamentals look positive for all regions at the moment. Are there any particular stars from your point of view as someone who has the broad run of the lot?
Vaight: Yeah, I think, you are exactly right that actually you do need to be quite discerning in terms of which emerging markets you look for. To me, I like ones where we are seeing this strong profit delivery. We see attractive valuations, but also seeing a kicker in terms of corporate behaviour. So, I'd actually highlight areas like Korea, the market which is on less than 10 times earnings, delivered you, I think, approaching 40% to 50% earnings growth last year, looks set to continue to grow. But also, what we are seeing is, those earnings are translating down into better cash flows, better dividends.
So, as a shareholder, you are also benefiting, and we are seeing companies also buy back shares. And I think that is a trend which is much earlier cycle. So, in the US, we have seen corporate buybacks for the last four, five years which has helped equity markets. It's only just starting in emerging markets. So, the fundamental turn is just starting but it's also this corporate behavior as well which is just starting which I think just underpins this recovery we are seeing.
Wall: Matthew, thank you very much.
Vaight: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
