Bargain-hunter: Raheel Altaf buys ‘undervalued’ stock
Everyone loves a bargain, but finding shares at a snip is a challenge in developed markets, such as the UK and the US.
It can pay a risk-taker to look further afield to emerging markets. These are countries such as China and Russia, whose economies are full of promise and where shares can be bought and sold relatively easily.
The bargain-hunting managers at Artemis Global Emerging Markets fund, Raheel Altaf and Peter Saacke, have scoured these markets to stock up on the shares of companies – nearly 100 at the last count – that look undervalued but have strong growth prospects.
The upshot of this approach is that the pair have purchased many ‘fallen angels’ in the almost three years since the fund’s launch. These are sound companies that just happened to falter during tough times, meaning their shares were good value.
Now that economic growth is taking hold around the globe, their potential is beginning to filter through and the managers’ cunning plan appears to be paying off, with the fund outperforming many of its rivals. Altaf says: ‘When we launched, there was much pessimism about emerging markets. But things can turn around very quickly.’
The managers are constantly mindful of the political risk – not least the recent confrontations between the West and Russia and the threat of a US trade war with China. Altaf says: ‘Political risk comes with the territory and is discounted in the prices.’
He reckons the impact of any trade war will be limited because of the low exposure of emerging markets to the targeted sectors.
What they are looking for is ‘the positive catalyst’. In Russia, they are seeing many companies’ reported earnings perform better than expected at the same time that their shares are being undervalued by as much as 40 per cent. This mismatch is providing opportunities. Capturing their attention in Russia, particularly, are energy and commodity firms.
After a long period in the doldrums, the fallen angels of these sectors are rebounding due to the country’s healthier economic outlook. For example, the managers have held Tatneft, a Russian oil producer, for a couple of years.
The Artemis managers have backed Globaltrans (Russia) and Daqin Railway (China), both railroad companies, and Lenta, a rapidly-expanding Russian grocery chain
The holding has proved its worth, with the share price rising 70 per cent over 2017 – and by 22 per cent in January this year alone. The shares are still trading on a price-earnings ratio of about nine times, a sign they are still undervalued – by about 25 per cent compared with the market as a whole. By comparison, the FTSE 100 Index’s price-earnings ratio is 14 times.
The swelling ranks of the middle classes in most emerging markets are helping to provide the fuel for profitable opportunities. To meet consumer demand, investment is pouring into infrastructure and other key areas. For this reason, the Artemis managers have backed Globaltrans (Russia) and Daqin Railway (China), both railroad companies, and Lenta, a rapidly-expanding Russian grocery chain.
Altaf says: ‘In the next ten years the Asian economies are forecast to represent 60 per cent of the world’s infrastructure spend and that will feed through to other areas, such as construction and telecoms.’ For this reason, China’s Anhui Cement, a giant in the building materials industry, has a place in the portfolio.
Juliet Schooling Latter, of broker Chelsea Financial Services, likes the fund. She says: ‘Its contrarian approach works well in emerging markets.’