Understand emerging markets opportunities and the American Century advantage.
By Al Polit - April 11, 2019
Headed into the second quarter of 2019, we’re seeing two types of tailwinds benefiting our Non-U.S. Intrinsic Value Strategy: a marketplace that is extrapolating short-term results into the future, and undervalued emerging market currencies.
What does that mean for my investment portfolio? We’re overly allocated in the financials space, and I also see opportunity in consumer discretionary and emerging markets. And at a more granular level, two companies I like right now are Kingfisher and BNP Paribas.
Watch my quarterly outlook video, below, for a deep dive into all of these topics.
In our Non-U.S. Intrinsic Value Strategy, where we’re allocated from a bottom-up perspective is principally financials, consumer discretionary and emerging markets. We believe those will be the key drivers to our performance over the next several years.
We are overly allocated in the financials space. Principally the reason being that in this low and negative interest rate environment, it makes it challenging for commercial banks, which are heavily weighted in the financials sector, to earn a more normal profit. So, the marketplace is extrapolating these short-term results well into the future. But if we look out, there should be an environment where rates will end up readjusting to more normalcy. We believe those commercial banks in the financial sector will end up earning their cost of equity over time.
The greatest tailwind we see is with emerging market currencies. We took a look at real effective exchange rates. It’s known in the industry as REERS. R-E-E-R-S. We compare the REERs for the U.S. dollar against emerging market currencies. And if we look over the last 15 years, the same environment that we’re in today, which is one of a very strong U.S. dollar and very weak emerging market currencies, over these last 15 years, you’ll notice similar situations as we are today have resulted in periods going forward where emerging market currencies end up reverting and appreciating. That being said, we believe emerging market currencies today are undervalued and have the potential for appreciation going forward.
One of the companies we like is Kingfisher. Kingfisher is a UK-based retailer that has operations in the UK, Ireland and France. They’re principally focused on do-it-yourself stores, similar to Home Depot and to Lowe’s. The shares are attractive today. But if you add in the significant efficiencies that management is looking to extract from taking a much more unified approach across all of its geographic locations, the shares are much more compelling. Add to that that it has a solid balance sheet and it had real estate backing—which could end up extracting more value for shareholders. And you have a situation where you have an asymmetrical risk-reward profile. Where you have limited downside and yet significant capital appreciation potential.
Another name that we like is BNP Paribas. BNP is a French-based bank. They’re involved not only in France, but they’re also involved in other European markets. They tend to have leading market positions in almost all markets they operate in and all business segments. The shares, along with other commercial banks in Europe, have been depressed because of the low and negative interest rate environment that we’re dealing with. Also, the anemic growth in Europe. Unlike the U.S., where you’ve seen a lot of M&A activity, you haven’t had that same situation happen in Europe, and so that’s depressed the investment banking piece. But the bank has a great balance sheet. It has a very balanced loans-to-deposits ratio, and last but not least, being absolute value investors, we focused on valuation metrics, and it’s trading at 65% of tangible book value—which in light of the environment today, where you have less leverage of commercial banks than you had 10 years ago, we think is highly attractive. The American Century Non-U.S. Intrinsic Value Strategy we feel has an asymmetrical risk-reward profile: limited downside and significant capital appreciation potential.
What I’ll leave you off is that we’re trading at one of the lowest price-to-books that we’ve had since strategy inception at 50% price-to-book. When you compare that against the bookmark, we’re trading at a peak discount relative to that benchmark since strategy inception. Not only is it attractive from an absolute perspective, but on a relative basis, we think it’s also attractive.
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Non-U.S. Intrinsic Value is a bottom-up, absolute, intrinsic value strategy that adheres to the principle of margin of safety in constructing a benchmark agnostic portfolio of approximately 40 to 60 securities.
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Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
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