FANG-weary investors look to emerging markets

Investors weary of the biggest US technology stocks after their unprecedented rally and recent bout of volatility are eyeing cheaper alternatives in emerging markets. Just like their US counterparts, developing-nation tech giants including Samsung Electronics Co. and Tencent Holdings Ltd have surged this year, but their valuation discount is near the highest in 18 months. For emerging-market bulls, the thinking goes why buy Amazon.com Inc at 67 times the projected earnings when Alibaba Group Holding Ltd’s ratio is just 29 times.

The valuation gap is bound to shrink over the next few years, making emerging markets the best bet for stock pickers who want technology shares, but are concerned that the run-up in the so-called FANG stocks — Facebook Inc, Amazon, Netflix Inc and Google parent Alphabet Inc — is due to reverse, according to Heinz Ruettimann, an analyst at Julius Baer Group Ltd. “If I had to make a choice for the next three to five years, I would add emerging-market information technology stocks,” he said. “Future growth prospects are better.”

Information-technology shares in the MSCI Emerging Markets Index have surged 35 per cent this year, trouncing the 20 per cent gain for the Nasdaq 100 Stock Index. Like in the US, the rally has been led by just a few of the biggest names, with Samsung, Tencent, Alibaba, Taiwan Semiconductor Manufacturing Co. and Naspers Ltd accounting for almost a third of the emerging market gauge’s advance this year.

But the developed-nation stock index still trade at a 36 per cent premium on a price-to-forecast-earnings basis, near the most since November 2015 and more than double the gap of just a year earlier. Ruettimann says the chasm is bound to narrow as the emerging-market companies develop their own brands, social media channels and business cycles. shifts. The state-owned banks are still in a painful situation, expect SBI, which is relatively well-positioned. We see some improvement in Axis Bank and ICICI Bank but they are not that well-positioned due to some exposure to corporate sector,” Rajah said.

HDFC Bank, Yes Bank, Kotak Bank continues to be top holdings

Medium term

The market may feel some short-term pain, but the broad gauge will still give decent returns.

“If you look at market cap to GDP it is close to long-term average. The PE is slightly above long-term average but earnings are below long-term average due to market contraction,” Rajah said.

“We expect margins to normalise over a period of time, so a higher PE should not a major concern for the broad market,” Rajah added.

And the risks to India have been reduced significantly because the current account deficit and fiscal deficit is under control.

“Structurally, the government has done a lot of things to control inflation. For India the biggest stress has been created by higher oil prices. The ability to absorb higher oil prices is much higher than in 1991 or 2013,” Rajah said.

“India is best positioned in emerging markets to attract inflows, as many risks have been removed by the new government. The story continues to become stronger,” Rajah said.