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emerging markets

Up until Nov. 8, Mexican stocks were having a pretty good 2016.

Considering how frequently Donald Trump blamed Mexico for American problems, real and imagined, his victory in the presidential election put a swift end to a solid rally in Mexican equities.

By the end of the following week, the main Mexican benchmark had fallen by 8.5 per cent, or 17.6 per cent in U.S. dollar terms, factoring in the plunge in the peso.

For emerging markets' value investors, this provided a rare opportunity.

"We were able to make our first investment in many years in Mexico," said Mohammed Ahmad, portfolio manager of emerging markets equities at Foyston, Gordon & Payne (FGP) in Toronto.

The firm staked out a position in Kimberly-Clark de Mexico, which makes personal care and household hygiene products.

In the month after the U.S. election, the company's shares declined by nearly 25 per cent.

"It's historically been out of our reach because of its valuation," Mr. Ahmad said.

He was speaking at a client breakfast in Toronto on Wednesday focused on the implications of a Trump presidency on the firm's portfolios.

As for Mexican equities, the market reaction, at least in the immediate aftermath of Mr. Trump's upset victory, was overwhelmingly negative.

Fear of a trade war crushed sentiment toward Mexican stocks, with all but two names within the benchmark declining in the initial sell-off.

"But there are some very high-quality companies in that country that are domestically focused," Mr. Ahmad said. One of those is Kimberly-Clark de Mexico, he said, which generates about 95 of its revenue within the country. He accumulated shares through December and January at an average price of 36 pesos, and trading at about 20 times earnings, well below historical average.

FGP's approach to equities involves screening for quality names trading at a discount to the market. In much of the developed world, the criteria have been difficult to meet as stocks everywhere have surged over the past three months.

The opportunities that do exist are concentrated in the United States, contrary to the increasingly common outlook that foreign stocks are more attractive right now, said Stephen Mitchell, FGP's portfolio manager of global equities.

While U.S. stocks have outperformed European and Asian stocks over the past year, direct company-to-company comparisons finds better value in the United States, at least outside of financials, Mr. Mitchell said. FGP says it typically judges value based on price-to-earnings but also looks at other criteria, including discounted cash flows and comparable private market transactions.

"If you look at consumer staples, or industrials, the European guys are in most cases at a premium to U.S. peers. That's not normal."

As a result, about 60 per cent of FGP's global portfolio is currently based in U.S. stocks, which is the same proportion normally reserved for Europe and Asia.

He pointed to Walgreens Boots Alliance Inc., the giant global pharmacy chain, as a holding well-suited to the times – high barriers to entry and resilient to all economic conditions.

"This is a company that should be able to grow earnings at double-digit levels for the next few years, and it's trading at less than the market average," Mr. Mitchell said.

One of the difficulties in trying to position for Mr. Trump's agenda is that some of his policies seem contradictory, Mr. Mitchell said. A company that benefits from corporate tax cuts might also be hurt by trade disputes resulting from U.S. tariffs. The better long-term approach is to prepare for turbulent times by constructing a portfolio with downside protection in mind, he said.

FGP is prepared to act on the next sell-off, Mr. Mitchell said.

"We're hopeful that being in a period of change will increase volatility in the markets, and allow us to buy high-quality companies trading at less than they're worth."

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