Its not been a good year for UK investors with exposure to emerging markets. Slowing growth in China and crashing commodity prices have taken their toll on a number of London-listed firms.
Its not clear whether weve seen the bottom yet, but I think were getting close. Buying stocks exposed toemerging market may still feel uncomfortable, but valuations are starting to seem more attractive. This could be a sign that contrarian opportunities are emerging.
In this article Im going to take a look at two popular stocks with emerging market exposure, both of which I own.
One of the biggest fallers in the FTSE 100 this year has been Standard Chartered (LSE: STAN), whose shares are down by nearly 50% so far this year.
Falling earnings, and fears that the bank could face a tidal wave of bad debts, led Standard Chartereds new boss Bill Winters to launch a 3.3bn rights issue in November.
Opinion is divided over whether this new cash will be enough to strengthen Standard Chartereds balance sheet and help turnaround its performance. As a shareholder who took part in the rights issue, Im cautiously optimistic.
However, even if Im wrong, I am confident that Standard Chartereds valuation contains a far bigger margin of safety than it did six months ago.
The banks current share price of 500p gives a 2016 forecast P/E rating of 10 and puts the stock at a 50% discount to the banks tangible net asset value of 1,030p per share. Although the dividend has been cut, the latest forecasts suggest a dividend yield of 2.9% for 2016.
I think that these metrics make a fair allowance for further bad news and asset write-downs. On this basis, I think Standard Chartered looks like a good medium-term recovery buy, although there is still a chance of further bad news in the short term.
Chinas crackdown on corruption has not helped Diageo (LSE: DGE) to sell more of its premium spirit brands. Foreign exchange losses and lacklustre sales in North America have also put pressure on the firms profitsHowever, a strong performance in Africa helped offset some of these headwinds. The firm manage to squeeze out a small increase in earnings per share and the dividend last year.
So far this year, weve seen Diageo re-focusing its portfolio on its core assets by selling sub-scale wine assets.The firm has also been making changes to the way that stocks are supplied and accounted for in North American, which is expected to reduce sales in North America by 2% for the six months ending in December, before delivering a strong performance in the first half of 2016.
Diageos share price has remained range-bound this year. The stock is currently within a few pence of Januarys opening price. This puts Diageo on a 2015/16 forecast P/E of about 20, with a prospective yield of 3.2%.
Although this is not cheap, Diageos five-year average operating margin of 28% and the firms portfolio of valuable brands suggest to me that the groups long-term growth potential remains sound.
My approach to investing in Diageo is to drip feed money into the stock periodically, in order to benefit from any price dips. In this way, I plan to add more Diageo shares to my portfolio in 2016.
I’m not the only Fool who is bullish about Diageo. The Motley Fool’s top analysts recently selected the firm as one of their “5 Shares To Retire On“.
The team’s view, which I share, is that Diageo shares have the potential to outperform the wider market over the long term and provide inflation-beating returns.
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Roland Head owns shares of Standard Chartered and Diageo. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.