It’s not been a good year for UK investors with exposure to emerging markets. Slowing growth in China and crashing commodity prices have taken their toll on a number of London-listed firms.
It’s not clear whether we’ve seen the bottom yet, but I think we’re getting close. Buying stocks exposed to emerging market may still feel uncomfortable, but valuations are starting to seem more attractive. This could be a sign that contrarian opportunities are emerging.
In this article I’m going to take a look at two popular stocks with emerging market exposure, both of which I own.
Standard Chartered
One of the biggest fallers in the FTSE 100 this year has been Standard Chartered (LSE: STAN), whose shares are down by nearly 50% so far this year.
Falling earnings, and fears that the bank could face a tidal wave of bad debts, led Standard Chartered’s new boss Bill Winters to launch a £3.3bn rights issue in November.
Opinion is divided over whether this new cash will be enough to strengthen Standard Chartered’s balance sheet and help turnaround its performance. As a shareholder who took part in the rights issue, I’m cautiously optimistic.
However, even if I’m wrong, I am confident that Standard Chartered’s valuation contains a far bigger margin of safety than it did six months ago.
The bank’s current share price of 500p gives a 2016 forecast P/E rating of 10 and puts the stock at a 50% discount to the bank’s tangible net asset value of 1,030p per share. Although the dividend has been cut, the latest forecasts suggest a dividend yield of 2.9% for 2016.
I think that these metrics make a fair allowance for further bad news and asset write-downs. On this basis, I think Standard Chartered looks like a good medium-term recovery buy, although there is still a chance of further bad news in the short term.
Diageo
China’s crackdown on corruption has not helped Diageo (LSE: DGE) to sell more of its premium spirit brands. Foreign exchange losses and lacklustre sales in North America have also put pressure on the firm’s profits However, a strong performance in Africa helped offset some of these headwinds. The firm manage to squeeze out a small increase in earnings per share and the dividend last year.
So far this year, we’ve seen Diageo re-focusing its portfolio on its core assets by selling sub-scale wine assets. The firm has also been making changes to the way that stocks are supplied and accounted for in North American, which is expected to reduce sales in North America by 2% for the six months ending in December, before delivering a strong performance in the first half of 2016.
Diageo’s share price has remained range-bound this year. The stock is currently within a few pence of January’s opening price. This puts Diageo on a 2015/16 forecast P/E of about 20, with a prospective yield of 3.2%.
Although this is not cheap, Diageo’s five-year average operating margin of 28% and the firm’s portfolio of valuable brands suggest to me that the group’s long-term growth potential remains sound.
My approach to investing in Diageo is to drip feed money into the stock periodically, in order to benefit from any price dips. In this way, I plan to add more Diageo shares to my portfolio in 2016.