Investors should reconsider investing in global emerging market equities because they’re quite cheap at their current valuations, if one is prepared for an investment horizon of one to three years.

Sadly, nowadays investors want quick returns and have much shorter investment horizons. Many investors are still risk-averse when it comes to global emerging markets, which have suffered net outflows over the past five to six years, although they began seeing some inflows in 2016.

According to Sam Bentley, client portfolio manager for Eastspring Investments on the global emerging markets team, global emerging markets currently provide good opportunities for value investors with a bottom-up or stock-picking investment strategy.

“Basically, what we try to do as value investors is to identify short-term market price dislocations, especially short-term price movements of the stocks. If the stocks are cheap, we put a lot of work or research into it. It’s a simple, very qualitative, fundamental-driven research process which delivers a very focused 50-stock portfolio of the best ideas across global emerging markets. So this is not a tracker, it’s not an index, it’s very active management,” says Bentley in an interview with The Asset.

Based on Eastspring’s research, there is currently a wide price differential between the cheaper value stocks and the more expensive stocks that are currently favoured by investors who are optimistic about the prospects of emerging markets.

“If you compare today’s price-to-book at 1.6x to its historical average of 1.8x (price-to-book), it’s cheap enough relative to its 10-year average. So that gives investors some comfort. If you look at the performance of emerging markets, there’s a high correlation between the price you pay and the future performance. So buying things when they’re cheap leaves on average a strong performance,” says Bentley.

Further, global emerging markets equities relative to developed markets, and particularly relative to the US, are very cheap in terms of valuation.

“If you think about developed markets, the US market is trading at 3x price-to-book and hitting all-time highs, while emerging markets still have a lot of value relative to that. So if you’re thinking about it in a global picture, there’s a lot of value in the price of emerging market equities. There’s a lot of yield in emerging market prices at the moment. So relative to developed markets it’s attractive,” says Bentley.

In addition, there is a dislocation between different types of stocks in the emerging markets, which means an investor can find opportunities within the market itself by being selective in which stocks to invest in.

For example, there are the stocks which are generally favoured by investors because they are high-yielding quality companies which generate cash and pay dividends. However, these stocks tend to be expensive and volatile. On the other hand, there are cheaper value stocks which are expected to provide good investment performance over a longer-term horizon.

“The stocks that people like are expensive and have been [expensive] over the last five years really. It’s been a bit volatile, but basically a lot of people have been risk-averse as a whole. Where people have stayed in emerging markets they have stayed in defensive high-quality names,” says Bentley.

Bentley lead manages the firm’s global emerging markets fund which has US$458.2 million in assets under management as of the end of April 2017.