One of the great things about classic value-led investing is I can buy shares and hold them for a long time. When the strategy clicks, out-of-favour stocks and businesses with temporary problems can recover over time.
And when that happens, ongoing operational progress can drive stocks higher in the years ahead. And as the outlook for a business improves, the stock market sometimes ratchets up a company’s valuation.
Returns can be worth pursuing
So a company that was once trading with a price-to-earnings rating of perhaps eight can eventually be seen by the market as a hot stock again and trade on a multiple of, say, 20. And that new rating will likely apply to higher earnings too — so the overall outcome for value investors can be spectacular.
Of course, value investing doesn’t always generate such good results. Sometimes low-rated businesses prove to be cheap for very good reasons. And it’s possible to buy a value share that then goes on to get even cheaper and never recover. If I keep holding dogs like those I’ll lose money in the long run.
But, for me, the balance of risk against potential reward favours picking value shares when the time looks right. And my impression is it’s a great time to be targeting UK stocks with robust value characteristics.
One stock on my radar is the FTSE 250‘s Ashmore (LSE: ASHM). The company operates as an emerging markets investment manager. And at around 285p, the share price is down about 36% over the past year.
In today’s second-quarter trading statement covering the period to 31 December 2021, the figures are negative. The firm declared a $4bn decline in assets under management in the period. And that arose because of net outflows of $2.2bn from the company’s funds and negative investment performance of $1.8bn.
A positive outlook
Chief executive Mark Coombs reckons the underperformance arose because of “Persistent global inflation expectations, new Covid-19 variants and weaker growth in China.” And the “challenging” conditions for emerging markets continued through the final months of 2021.
I don’t currently hold any shares in Ashmore, but those emerging market investments already in my portfolio have been weak lately too. My hope is the situation will improve shortly making the investment space attractive again.
And Coombes is optimistic as well. He said the global macro-economic environment looks set to be more supportive for emerging markets in 2022. And he thinks that because of factors such as fiscal and monetary stimulus for China’s economic growth. And in the US, Fed policy tightening “is already reflected in valuations.” Meanwhile, commodity prices “are providing a tailwind to the terms of trade, and therefore the external accounts, of exporters.”
Coombes explained in the report that “very little” of the positive outlook is priced in to fixed income and equity valuations in emerging markets. And that situation suggests to me the area is a potential value investment theme worth pursuing.
And with Ashmore’s share price near 285p, the forward-looking dividend yield for the current trading year to June 2022 is a smidgen below 6%. Of course, there are no guarantees of a positive long-term investment outcome for me.
But I reckon the value proposition looks sound with Ashmore, and the stock is high up on my watchlist. I’d buy it now if I had spare cash.
