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For Professional Clients and, in Switzerland, for Qualified Investors only. In Israel for Sophisticated Investors only.
English
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IDEAS AND KNOWLEDGE TO INSPIRE YOUR INVESTMENTS THINKING
14 November 2018

State of decay: Does government control erode EM value?

In more developed markets, concern over state intervention centres around central bank policymaking. While that is of course highly relevant across emerging markets too, there is in fact an even larger state-led consideration when investing in these markets: the fact that c.23% of the MSCI Emerging Markets index is comprised of state-owned enterprises (SOEs).

 

The majority of these companies are not run with profit-maximising intention. They tend to be strategic state assets such as banks, or utility and resources companies, with heavy capital-expenditure burdens. This tends to make them poor stock investments over the long term, though a major commodity bull market can change the optics temporarily. Return on equity (ROE) is usually less important than other strategic desires of the state in capital-allocation decisions.

 

State ownership can provide stability, but this may involve significant shareholder value dilution, as minority investors tend to be a low priority in stressed situations or in capital-allocation decisions. Interestingly, we saw such dilution with many Western banks following the global financial crisis, and emerging-market companies are perhaps even less likely to focus on shareholder value in such situations.

 

We currently take zero exposure to SOEs and find the technology, consumer and health-care sectors are relatively free from state control and are where we find the most interesting investment opportunities.

 

Naomi Waistell, portfolio manager Emerging and Asian equity team. Newton Investment Management – a BNY Mellon Company

Please note the content on this website is for Investment Professionals only and should be shared responsibly. No other persons should rely on the information contained within this website.

 

Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.

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