Driving Outperformance With A State-Ownership Screen

The value factor has outperformed growth globally, including in emerging markets (EM), since the last half of 2020.

Valuations for growth companies in EM look “stretched” by traditional metrics —while many notable value investors believe EM value stocks represent one of the bright spots for forward-looking returns. 

EM value multiples have remained stagnant and near single-digit numbers over the last six years—tough to find in the U.S.—while growth multiples have been rising. 

Meanwhile, it encourages us to see how the WisdomTree Emerging Markets ex-State-Owned Enterprises Index (EMXSOE), which has elements of a growth-tilted core strategy, has managed to generate excess returns over this most recent period, we believe solidifying its state-owned enterprise (SOE) screen as a driver of outperformance.

Valuations in EM

The rapid recovery in prices and sluggish earnings and sales we’ve experienced over the last 12 months have caused standard valuation metrics to spike in certain markets. EM is one. 

As we can see in the chart below, trailing price-to-earnings (P/E) for companies in the most expensive valuation quartile (“EM Growth”) spiked in the middle of last year, deviating from its historical spread versus the lowest multiple stocks (“EM Value”) and the broad MSCI EM Index. (These sorts are all done within industries, so they don’t represent sector bias of higher multiple sectors). 

It is interesting to see how the S&P 500 Index’s P/E ratio has followed a similar path as the EM growth stocks, and the EM value basket is trading around the same 10 times earnings it has traded at over the last six years.

P/E Ratio

Figure 1_PE ratio

Premium Multiples for Premium Growth Rates

When profit and sales growth is scarce, investors may assign greater value—and higher multiples—to those companies that are consistently growing. Combining valuation with sales and earnings growth metrics can give investors greater insight into why they see significant valuation spreads in certain areas of the market.

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