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Global Top Cat

China: Buying Oil

By Yiannis G. Mostrous, on Oct. 12, 2017

Based on Elliott Gue’s latest call for higher oil prices next year and the general come back of the energy sector, the view here is that investors should also own energy companies in emerging markets.

Short term, emerging markets have outperformed and they can continue to do so into 2018. Looking at the previous quarter, emerging markets clearly led, returning eight percent versus five percent for developed markets (based on MSCI indices and in USD terms). Specifically, Latin America was up 12 percent and emerging Asia seven percent. Developed markets, like the US, Japan and Europe, gained around four percent.

Our overall economic view remains constructive . Expect growth to remain broad based, with global GDP growing by around three percent this year and next with emerging markets leading the way.

(Click to enlarge.)

When it comes to emerging markets, investors continue to shy away from growth sectors like materials, energy and tech. This is despite those sectors, especially the latter, performing particularly well. Few investors seem ready to believe what has been noted here for more than two years: The global economic recovery is for real, even if it’s cyclical in nature.

Instead, investor focus remains on sectors and stocks that are considered safe. As a result, these safe areas have become expensive and don’t offer serious upside potential from a momentum standpoint. This safe approach will hurt more in the last quarter of the year, as it’s this quarter that traditionally rewards momentum and value strategies in emerging markets.

Emerging Energy

Energy companies in emerging markets are stabilizing in terms of earnings. With economic growth remaining respectable, the picture should improve and help the shares climb higher.

On a price to book metric (a long-term favorite here when looking for value in emerging markets, especially Asia), the energy sector trades at a 50 percent discount to its 20-year average. That makes it the cheapest sector in the emerging markets universe. Furthermore, the sector has lost more value than any other since the highs of 2007.

Asia, since 2000 really, remains the favorite region here in both the short- and long-term. The fundamentals of the Asian economies have constantly improved. And under the economic leadership of China and India, the region is poised to dominate for a long time.

China’s energy sector offers descent value and a lot of growth potential–keep in mind Mr. Gue’s call for higher oil prices.

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