This story was updated on March 26, 2014.
New York investment bank Brown Brothers Harriman & Co. sees emerging market stocks as attractive despite economic uncertainty and capital flight. The private finance firm has doubled holdings in such stocks recently, according to the firm’s chief investment strategist Scott Clemons, and could pour more money into emerging markets in coming months.
“On average, our portfolio has gone from 5 percent exposure to emerging markets – pretty limited – to about 10 percent,” Clemons told International Business Times at a coffee industry conference, after a presentation on the U.S. and global economy. “In an incremental way, we’re holding up the possibility of raising that up even further in the months and quarters to come.”
Brown Brothers Harriman managed $4 trillion in total assets at the end of 2013, though Clemons personally helps oversee $28.4 billion in the company's investment advisory practice. The company offers financial advice to corporate and individual clients. They previously doubled that exposure from 5 to 10 percent in the summer of 2013, just as tapering fears sparked capital flight and currency depreciation in emerging markets.
Clemons cited wide gaps in price-earning ratios between U.S. stocks and emerging market stocks. Investors have feared in recent months that some U.S. stocks may be overvalued, as U.S. equity benchmarks surged to records in 2013. The price-earnings ratio compares the price of a stock to its underlying profits and indicates investor sentiment.
“We believe the compelling valuations in emerging markets are better than we’ve seen since the Russian debt fall of 1998,” said Clemons at the industry presentation. “That’s contrarian, to the point of being a little scary.”
Clemons pointed out that stock markets in India and China actually fell in U.S. dollar terms in 2013, even as markets in Japan, the United States, and the United Kingdom enjoyed major rallies, often gaining 20 percent or more.
Browns Brothers Harriman has invested the bulk of its money in China and India in roughly equal measure, Clemons told IBTimes. Brazil, Turkey and Mexico are other countries where they maintain equity investments, though “unacceptable” geopolitical risk in Russia means they’ve avoided Russian companies.
Investors in emerging markets were unnerved again early in 2014, as foreign investors withdrew from promising markets, partly due to soaring inflation and political crisis in nations like Argentina, Venezuela, Turkey and Thailand. Swiss bank UBS AG (VTX:UBSN) estimates that investors withdrew at least $15.9 billion from emerging market funds in 2013.
But that so-called “headline risk” is only a small part of the picture, said Clemons.
“That disconnect between the big picture – a lot of worry and hand-wringing – and the small picture of businesses still doing very well in that environment: that’s what creates the valuation opportunity,” he said.
“You can have good value or good news, but rarely do you get both,” he told his industry audience, echoing an old investment adage.
Clemons has previously said that emerging market equities are the most attractive among global equities in 2014.