Top fund manager David Herro thinks emerging-market stocks remain overpriced, but he thinks there is a way for investors to benefit from emerging market growth.
Herro tells Barron’s that he’s underweight emerging markets. While he is a long-term bull on emerging market economies, he thinks emerging market stocks are too pricey. “You can buy companies in developed markets selling at much better values, with exposure to structural growth in emerging markets,” he says. “You get lower-priced stocks, stronger corporate governance, and while emerging markets pick up, these companies are doing well in Europe and the United States. The trend in emerging markets is for the consumer to get stronger and stronger over time, so the best way to take advantage of this is to buy low-priced stocks based in the West with a lot of exposure to the emerging-market consumer.”
Among Herro’s favorites right now are European financials like BNP Paribas and Credit Suisse Group, and global brands like Daimler and Diageo, which have EM exposure but are cheap.
What does Herro worry about? “In these unstable times, if there is an economic shock, to withstand it and be offensive, as opposed to defensive, you have to watch balance sheets and cash flow,” he says. “You have to make sure you are not exposed to operational and financial risk at the same time. Operationally geared businesses have fixed costs like a big smelter – volumes drop, but you can’t shut it down — versus a business where you can cut purchases, inventory or people. As long as the company has a lot of variable costs and not a lot of fixed assets, you can handle a downturn better. But if it also is operationally geared, that can spell trouble.”
Herro also offers his take on interest rates and the impact they’ll have on equities, specific markets like Brazil and Japan, and whether he thinks another downturn looms for Europe.