CM cautions investors on emerging markets and commodities

RE:CM, a value based asset manager that invests only in under-valued businesses, has cautioned investors to be wary of getting caught up in the hype around emerging markets and commodities, both of which it believes are overvalued at present.

Daniel Malan, Investment Director at RE:CM, says that their analysis shows that the prices of most emerging market assets are currently above estimated fair values. As a result the RE:CM Global Fund has virtually zero exposure to assets domiciled in these markets.

He says commodity stocks are also expensive at current levels. “By comparing direct commodity prices to the marginal cost of production, we draw the conclusion that the current prices are trading at substantial premiums and that investment in direct commodities do not afford attractive odds to long term investors. Furthermore, the stocks of businesses that operate primarily in commodities markets are trading above our estimated fair values.”

He says this has resulted in RE:CM funds not having significant exposures to commodity stocks. “In fully invested South African equity mandates, our clients currently have less than 10% cumulative exposure to commodity stocks Sasol, Harmony Gold and Omnia.”

Malan says while it is difficult to tell whether the recent selloff in emerging markets and commodity stocks is the start of a cyclical downward correction, the evidence suggests that investors who allocate capital to overvalued assets underperform and those that allocate capital to cheap assets outperform in the long term.

Instead, he says investors should focus on allocating fund capital to the best quality businesses anywhere in the world when they are cheaply priced relative to their fair value.

Malan says that in this regard, RE:CM has uncovered good value in high quality businesses in developed markets like the US, Europe and Japan. “This is not a result of a top-down view of the world's opportunities. Rather, we build our portfolios from the bottom up by researching individual businesses and buying them when they are priced well below fair value.”

Malan says that unfortunately, many investors choose to ignore fundamentals, preferring to follow the herd when it comes to making investment decisions. “Many market participants are driven by human emotion and prefer investing in 'winning' assets and regions, avoiding and even discarding 'losers'.

“This behaviour unfortunately exposes investors to high levels of risk. We believe it is the investor that loses the least in deep market declines that receives the best long term returns, not the investor that makes the most when markets advance.”

He says it is important for investors to ignore short term price changes in markets, focus on figuring out the values of assets and apply a disciplined investment process. “Alternatively, find a manager you trust to do the same and you are happy to pay a fair fee for such a service to.”