SINGAPORE - Undervaluations, robust corporate profits, good cash flow and decent returns make emerging market assets extremely attractive, even as US valuations hit their peak, says American finance executive James Donald.

Mr Donald, managing director and head of emerging markets at Lazard Asset Management, reckons emerging markets should be a major part of the portfolio of any global investor.

“Interest rates in these markets did not go up as much as they did in the US and other developed markets,” he said in an interview with The Straits Times. “In Asia, debt did not rise either. Emerging markets in Asia, Africa and Latin America trade at low valuation, deliver high profitability and report decent earnings.”

New York-based Lazard is one of the world’s largest financial advisory and asset management firms, with assets under management (AUM) of US$207 billion (S$279 billion) globally as at Dec 31, 2023.

Its emerging markets AUM stood at US$34.8 billion globally, including US$23.4 billion for Asia-Pacific.

Mr Donald said assets and equities in many of these markets, and particularly in Asia, are mispriced: “Valuations are inexpensive, so dividend yields will be high.”

He added that while Wall Street will remain buoyant as the US Federal Reserve starts cutting interest rates in the second half of 2024, the growth premium in relation to emerging markets will contract as the US economy slows, possibly during the second half as well.

Europe remains in recessionary mode in 2024, while China is struggling to reboot its economy, he said.

On the other hand, many emerging markets are growing and positioned to play a huge role in supporting global growth.

Mr Donald is particularly upbeat on Indonesia and India, and positive on Latin American economies such as Mexico and Brazil, which he noted are starting from a low base.

He also sees undervalued assets in Africa, especially South Africa.

Despite a projected US economic slowdown and recessionary conditions prevailing in Europe over the coming year, Mr Donald does not see a global recession.

“While some economies in the West will slow down, economies in emerging markets, especially in Asia, are still growing,” he said.

“This unsynchronised global growth is a good thing, because it prevents global boom and bust cycles. The global financial crisis of 2008 was the result of synchronised global growth. Equity investors today don’t want to see such synchronised growth.”

In Indonesia, Mr Donald sees huge upside for assets and equities linked to the extraction of resources such as nickel, which is used in the manufacture of electric vehicle batteries. He also likes Indonesian financial institutions like Bank Rakyat and Bank Mandiri.

“We are quite heavily invested in Indonesia, where the Joko Widodo government has done a great job,” he added.

Another promising Asian market is India, where the government has been focused on growing the country’s economic heft by attracting foreign investments and boosting infrastructure spending.

But, while holding a positive view on emerging markets, Mr Donald also noted that these markets are not uniformly the same. He identified several risks facing investors in some of them.

“In some countries, you see owners or controlling shareholders run their corporations like personal fiefdoms,” he said. “Then there is the issue of a lack of transparency and opaqueness in governance practices in some places.”

Mr Donald said global investors like Lazard are almost always minority stakeholders, so corporate governance and transparency are key considerations in investment decisions.

But corporate governance has been improving, as a new generation of owners, executives and managers rise to the fore.

Many companies in emerging markets also tend to have too much idle cash on their balance sheets, he said.

“We don’t like investing in highly leveraged (indebted) companies. That said, companies could use a bit of leverage (debt) to fuel their expansion. Too much cash makes for lazy balance sheets.”

On the whole, however, Mr Donald is upbeat on emerging market investments, especially in Asia and Latin America.

While equity markets in these countries have risen in tandem with Wall Street, they have more upside, given the underlying fundamentals and growth prospects.

“Asia, in particular, will do well,” he said. “Even Chinese stocks can do well. There is a real possibility that emerging markets will outperform all other regions of the world this year. They will be the most sought-after asset class. But the risks have to be managed as well.”