While the market-leading U.S. “FANG” stocks (Facebook, Amazon, Netflix, and Google) are well known to investors, their emerging market “BAT” cousins – Baidu, Alibaba, and Tencent Holdings – may be less familiar. But as the chart shows, movements in BAT stocks are worth watching. The BATs returned over 28% annualized for the five years ended June 2018, compared with 5% for the overall emerging markets (EM) index. However, market leadership changed dramatically in the second half of 2018, when the BATs corrected three times as much as the broader market. This contributed to value stocks’ outperforming growth stocks by 7.5% for the year.
We continue to see opportunities in EM equities, which broadly are trading at half the valuations of U.S. stocks, and EM value equities are cheaper still (using cyclically adjusted price/earnings ratios as of 31 March 2019). While a discount is to be expected given the higher risk of those markets, the current valuation gap is wide compared with historical norms.
The key takeaway for investors? EM equities may help support long-term returns of an overall diversified portfolio, but many investors may be overweight growth stocks in their EM equity allocations. Adding EM value strategies may improve portfolio diversification potential and help focus portfolios on areas with attractive valuations.
See “Putting Markets in Perspective” for more of our views on developments moving global markets.
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