“The LatAm market has fallen 30% in US dollar terms since the start of the year,” he said. “Much of this is down to the impact of falling commodities due to a slowing China.
“Generally speaking, foreign investment and portfolio flows into emerging markets have also dried up, and a rise in US rates might see these accelerate. There might also be further currency depreciation ahead.”
But while Coombs believes there is scope for heading into Latin America on a valuations basis, the associated hazards mean that potential investors should tread carefully.
“There is no question that these markets, whilst optically cheap, are highly risky, despite a small rally in recent weeks,” Coombs expanded.
“When we enter, we will do so cautiously through focused and benchmark-agnostic managers. We might look to make an initial investment in a specialist trust such as Findlay Park Latin American, but only on a significant discount and a very long-term view.
“One must remember that Brazil dominates LatAm benchmarks. Its high correlation to commodity prices remains a concern to us, as we retain our negative stance on cyclical commodity demand.”
Justin Oliver, deputy CIO at Canaccord Genuity Wealth Management, holds what he describes as a ‘long-term play’ – Alastair Mundy’s Investec UK Special Situations vehicle – which although its top 10 appears similar to many other UK equity strategies – BP, Shell, BG – the fund only overweights stocks that have underperformed market peak by at least 50%.
Oliver is also seeing openings following the Chinese stock market downturn, training his focus within the Great Wall. However, he believes that in order to orchestrate an effective contrarian trade, timing is essential.
“We are looking at China as an investment opportunity, but the problem with contrarian plays is that there is a thin line between contrarian becoming consensus,” he said.
“China is difficult because of the opaqueness of the market, and having any sort of conviction there poses problems. However, we do not think that conditions are as bad as they seem, it is unloved, and margin debt has sufficiently unwound. We are looking at putting money into the market, but are aware that it will be a rollercoaster.
“We have brought a couple of China funds into our approved funds list in the past couple of weeks – GAM Star China and New Capital China Equity. But given that it is a contrarian play, it depends on how long we would want to be exposed to the market before it becomes consensus, and we actually see the ETF route as the best way to access it.”
For David Cavaye, CIO at C. Hoare & Co, China also represents a potential arena for value capitalisation, but he is adopting a more cautious stance.
