A word of advice for emerging-market investors looking for refuge as China’s economy sours and U.S. rates are heading up. Don’t just go down the route of defensive stocks, says Joe Gubler, who oversees $2 billion at Causeway Capital Management in Los Angeles.
Here’s why: The price-to-earnings ratio of stocks that tend to hold up better in an economic downturn — such as food and beverage companies as well as health-care providers — traded at a 91 percent premium to their cyclical peers on the MSCI Emerging Markets Index in September, the biggest gap since 2008.
Historically, the premium investors are willing to pay for these types of securities is about 7 percent, according to Gubler, whoseCauseway Emerging Markets Fund has beaten 86 percent of peers in the last five years.
“People feel like this is a safe trade, but if you get the prices wrong, it’s not nearly as safe as what people were hoping for,” said Gubler, a former astrophysicist and software engineer who entered finance 10 years ago.
If you’re going to go for cyclical stocks, pick them in developing markets where the economy is not “a disaster.” He likes oil refiners in Turkey and Poland because they’re benefiting from strong demand for gas even as oil prices have tumbled. Gubler owns Kia Motors Corp., the South Korean carmaker, while he’s underweight companies in Brazil, Malaysia, and Indonesia.
Gubler hasn’t completely given up on defensive stocks, he’s just highly selective. Another one of his picks is Dr. Reddy’s Laboratories Ltd., the Indian maker of generic drugs.
“We don’t want cyclicality to become a make-or-break bet,” he said.