- By Region
State-run economies may have gained adherents in the aftermath of the financial crisis, but many asset managers still eschew emerging market companies where the government is a big shareholder.
That state-linked, listed companies should trade at a discount is almost an article of faith for many investors, who say these groups are frequently run as appendages of the state, rather than for the benefit of shareholders.
“There is a fear that these companies are not run for the benefit of shareholders, but for the wider economy,” says William Davies, head of global equities at Threadneedle.
Yet the shares of state-controlled emerging market companies have as a whole markedly outperformed private counterparts, both in the shorter and longer run.
Morgan Stanley has identified 122 companies in the MSCI Emerging Markets index that have a 30 per cent or higher state ownership. Collectively they have outperformed the benchmark index by a cumulative 260 per cent since January 2001, and by a third since the trough in October 2008.
“Co-investing with the state has historically been a winning proposition,” concludes Jonathan Garner, head of emerging market research at Morgan Stanley.
Mr Garner suggests several reasons for why these state-controlled companies have fared so well. Many are “national champions” that can benefit from state guaranteed loans or implicit support that lifts ratings and caps borrowing costs. Access to natural resources, specific budgetary allocations, tax benefits and regulatory exemptions also help.
Moreover, the reporting standards are often better than at smaller, private sector companies, and the trailing dividend yield – and the capital to cover these payments – is higher on average, Mr Garner points out.
Despite these advantages, the 122 government-related entities trade at a trailing price-to-earnings ratio of 7.9 times, a 31 per cent discount to the MSCI Emerging Markets index PE ratio, according to Morgan Stanley’s calculations. “This suggests significant relative value currently for the state-controlled group,” Mr Garner says.
Sam Vecht, head of emerging markets specialist team at BlackRock, says typically cheaper valuations of government-linked companies are a reason why their shares have fared better than faster-growing private companies.
“Value has massively outperformed growth in emerging markets, and these state-controlled companies in most cases offer more value than growth,” he says.
State ownership appears particularly beneficial in some sectors. By market capitalisation, almost two-thirds of the 122 state-controlled companies identified by Morgan Stanley are energy companies.
In this industry, government links can be advantageous, Mr Davies says. “Integrated oil companies sometimes struggle to make headway in some countries, while national oil companies enjoy the backing of their state, so in this case investors may benefit from aligning with the government.”
One example is Ecopetrol, Colombia’s state-controlled oil company. Since listing in 2007 its shares have appreciated almost four times in local currency terms. Since the October 2008 trough, the shares have rallied 191 per cent.
“Ecopetrol is run like a private company, but enjoys all the benefits of state ownership,” says one fund manager.
Sberbank is another sterling performer. The Russian lender’s shares have soared 443 per cent since the October 2008 nadir, as the government’s stake has helped inoculate it against the damage wrought on many other banks by the financial crisis.
Indeed, although a government’s interests may occasionally run counter to the commercial concerns of minority shareholders, they are often no worse than those emerging market companies controlled by one family or dominant businessperson, argues Mark Mobius, executive chairman of Templeton Emerging Markets Group.
“I would say the risks are even greater with oligarch-controlled companies,” he says. “More and more governments realise that if they treat minority shareholders fairly, it will encourage more investment, and everyone wins.”
But not everyone is convinced that state-controlled companies are a winning bet.
Michael Wang, a strategist at Amiya Capital, an emerging markets-focused hedge fund, points out that a few big companies that have performed particularly strongly have boosted the overall performance.
“If you get your stock-picking right you could have made a lot of money, but there have been an equal number of state-controlled companies where you wouldn’t have made any money over the same period,” he says.
China’s state-controlled corporate behemoths are a good example of this. While China Mobile and China National Offshore Oil Corporation (Cnooc) have soared since listing, several Chinese banks, which dominate the local market, lend on government command rather than commercial interest and have disappointed many investors.
More recently, Petrobras and Vale, previously darlings of many emerging market investors, have lost favour on signs that the Brazilian government is taking a more activist, controlling role.
Fund managers agree that the quality of government-linked entities can be very disparate.
“It’s the nature of the state, and its ownership, that matters,” Mr Vecht cautions. “Some state-controlled companies have done really well and some have done very poorly.”