Let’s review the performance of my emerging market portfolio to end-April.
My EM allocation is based on a GARP approach — Growth at A Reasonable Price. I update the allocation every six months. If you want to know how I select emerging markets portfolio please refer to this post.
Here is the year-to-date performance of the main emerging markets in US$. You can see that the markets that typically face funding pressures such as Argentina, Turkey, the Philippines and Indonesia have been under-performing.
And here is my portfolio allocation since end-Dec:
Obviously I have some pretty beaten-up markets in my portfolio and my year-to-date performance is struggling. My portfolio is down 6.2% for the year while the MSCI EM Index is down only 1.8%. This reflects big drops in Argentina and Turkey where most investorts are worried about funding pressures caused by recent US dollar strength and I guess most investors see these two markets as highly risky.
However, my view is that the risk in some of these markets is already in the price. The following chart shows my currency adjusted valuations for Turkey. Remember these are the price-to-book and relative price to book valuations adjusted for the real exchange rate and normalized back to 1996. What the chart shows is that Turkey has never been this cheap. Yes, this is a risky market but we think Turkey is already priced for risk.
The argument for Argentina is not as strong. My country selection process has held Argentina since Dec 2012, during which time the market has rallied 196%. My basic GARP model cut its holding in Argentina at the end of Dec but the relative GARP strategy is still holding it. As the chart below shows, Argentina was super cheap at the end of 2012, as cheap as Turkey is now. If I had to choose between Turkey or Argenina, I would take Turkey because the bulk of the profit in the Argentina trade is probably done.
I could exit Argentina but I like to follow rule based investing and the rule for my relative GARP strategy has not yet reached its exit point.