Is it time to return to emerging markets with stock investments like these?

My emerging markets investments have been under the cosh lately, but the tide could be about to turn, and valuations in the sector look compelling to me.

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The FTSE 250‘s Ashmore (LSE: ASH) is one of the world’s leading investment managers specialising in value-oriented emerging markets assets.

But emerging markets have been underperforming lately. And at 285p, Ashmore’s stock price is down about 37% over the past year.

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Several emerging market stocks are down

However, Ashmore isn’t the only stock in the sector that’s down on its luck. Two such beasts reside in my own portfolio. I’m holding Fundsmith Emerging Equities Trust (LSE: FEET), which at 1,305p is down around 16% compared to one year ago. And I’ve got shares in Vinacapital Vietnam Opportunity Fund, which at 499p is about 9% lower in 2022 so far. But in fairness, it’s up by around 14% over the past year.

Ashmore’s chief executive Mark Coombs said in a trading statement this week that the firm’s recent operational underperformance arose because of challenging conditions. He pointed to things such as “persistent global inflation expectations, new Covid-19 variants and weaker growth in China”. 

But looking ahead, Coombs is optimistic about a recovery in emerging markets — and it could be soon. He thinks the global macro-economic environment looks set to improve and that could help emerging markets to thrive.

For example, he sees firmer commodity prices as a positive. And he thinks valuations already accommodate higher base interest rates. However, he feels emerging market equity and income valuations don’t account for much of the positive outlook. If he’s right, there could be an interesting value situation now with emerging market stocks and investments.

The case for investing

But why should I bother targeting investments in emerging markets? To answer that, I’m going to repeat what FEET’s chairman Martin Bralsford said in the company’s half-year report last August.

He reckons the case for investing in emerging markets “has not diminished”. There’s a growing consumer class in emerging economies. And they are being served by businesses with “strong local brands, innovative business models and some high-quality management teams“. Bralsford thinks emerging markets are catching up with the developed world and therefore continue to present good opportunities for investors.

I reckon there’s potentially good value to be had with these three stock opportunities right now. Ashmore’s forward-looking earnings multiple for the trading year to June 2023 is just below 13. And the anticipated dividend yield is around 6%. Meanwhile, FEET is trading on a price-to-earnings (P/E) ratio just below six with the price-to-tangible-book value around 0.87. And VOF’s P/E is close to just two with a price-to-tangible-book value of about 0.8.

Of course, a low-looking valuation doesn’t guarantee a decent long-term investment performance for me. And emerging markets could continue to struggle causing my investments to fall further.

But I’m optimistic that the pandemic will fade during 2022 and emerging economies will continue to recover. And I’d prefer to buy investments like these when they look cheap rather than when emerging markets are booming and the stocks look expensive.

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Kevin Godbold owns shares in Fundsmith Emerging Equities Trust and in Vinacapital Vietnam Opportunity Fund. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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