Ariel Investments is newcomer to emerging markets but the US-based institutional value manager is eyeing up bargains in faraway places such as beaten-down Chinese markets, high-tech hubs in Vietnam and air-conditioned Philippines malls.
Filipino malls are “what US malls want to be”, according to Henry Mallari-D’Auria, the recently appointed Ariel chief investment officer for global and emerging markets.
“People in the Philippines do everything in malls,” Mallari-D’Auria said. “Entertainment as well as retail. They go to church there and get medical treatment.”
Malls offer an air-conditioned back-drop for Filipino lives, he said, in an economy that has returned to pre-COVID levels – and an investment opportunity for shoppers drawn by the double-digit free cashflow, low valuations and growth trajectory.
In NZ last week on a client prospect visit, Mallari-D’Auria experienced the antidote to Manila mall-life in the deserted downtown streets of Auckland and Wellington on a public holiday.
But he said meetings went ahead with local institutional investors regardless, opening up dialogue on the Ariel emerging markets story.
While Mallari-D’Auria only joined the firm earlier this year, he came to Ariel after a 27-year career at AB (AllianceBernstein), most recently as CIO emerging markets.
He told Ariel clients in a note this June that emerging markets were at an historical turning point.
“In all the time I have been investing—32 years and counting—I have never seen today’s combination of attractive valuations and forecasted earnings growth in emerging markets (EM),” Mallari-D’Auria says in the note. “When the market has previously come close to where it is now, our investable universe had a lot more leverage than today’s environment. While large valuation gaps might leave some sitting on the sidelines—in our view, investing in emerging markets currently presents a rare opportunity.”
Ariel is a value-tinged stock-picker with the emerging markets fund holding just 60 companies out of a potential universe of 1,250 or so but the beta signals reflect a valuation disconnect with developed equities, especially in the US.
Mallari-D’Auria said the S&P 500 index is currently trading at 18-times earning versus 11-times in the broad MSCI emerging markets benchmark.
“Earnings growth in emerging markets is also set to outpace the US,” he said. “We expected emerging markets’ earnings growth of 20 per cent in 2024 versus just 10 per cent for the S&P 500.”
Amid the overall upbeat indicators (for value investors, at least), Ariel is focusing its emerging markets attention mainly in a handful of Asian countries with a smattering in Latin America where Brazil stands out.
The Philippines, South Korea, Taiwan and Vietnam all appeal, Mallari-D’Auria said, but the manager is also bullish on China, which has fallen out of favour in recent times on the back of poor growth figures, geopolitical angst and a brewing property investment crisis.
“Chinese equities are at their most attractive valuations ever,” he said, citing the example of insurer Ping An that is trading at 25 per cent of its book value.
China-domiciled stocks represent 30 per cent of the core Ariel emerging markets portfolio but the firm also offers an ex-China version.
Ariel launched the emerging markets strategies for institutional investors in April this year.
Founded in Chicago in 1981 by John Rogers, Ariel has a claim to be the first and largest minority-owned investment manager in the US. As at the end of September, the firm reported US$14.8 billion under management.