Managers and experts share their country and sector preferences:
Peter Duke, Sales Director, Fidelity, Middle East
Within the developing markets, South East Asian markets are indeed very attractive. One of the more attractive ones is the Philippines for example. The consumption story is very strong there.
In Africa, we are heavily biased towards places like Nigeria for example. We have got a little exposure to the UAE, which is still a frontier market but will be upgraded to the emerging markets category next year.
And within China, there’s a number of stocks we actually like that are more plays on the overall consumption story—the new China as opposed to old China.
When it comes to Russia, which is very dependent on what happens to the oil price, and over 50 per cent of the market being energy related, we have low exposure to energy.
Funnily enough, we are overweight Russia, because we think the overall economy will benefit from the high oil price. The oil companies per say, are the not the ones to stand to benefit. We have exposure to the banking sector, and in other areas of the market.
India: It’s quite an expensive market. But entrepreneurial activity is very high and you have lots of capitalists there. India is very good when it comes to the generic pharmaceutical business. They are one of the world’s leaders when it comes to that. Dr Reddy’s Lab, for example, is one we like. Banks are very cheap. We do need to see some very fundamental reforms. Until you start to see the government getting its act together, we are cautious on India.
Large caps, small mid caps: It really does differ from country to country, from company to company. Generally speaking with small caps, if you do well, they outperform mid to large caps. You have a research edge i.e. putting a lot of focus in terms of understanding a company. The larger a company gets it is more difficult to add information edge. Small companies will be better, that’s the general rule but it’s not always the case. Our emerging markets fund is biased towards mid to large caps stocks.
Arjuna Mahendran, CIO, Emirates NBD Wealth Management
In this era of globalization, especially in the past 20-25 years, we have seen size matters. And the reason that BRICS were ahead of the pack in the emerging markets was because they were so huge. And that also meant they could absorb global shocks much better. But the fact is BRICS markets are slowly down.
In the wake of this slowdown, you’ve seen other countries like Mexico, Turkey and Indonesia and the Philippines really seeing a second wind if you like in the emerging market space.
So at the moment, what’s happening is capital is flowing away from emerging markets and the ones that are the most vulnerable are the ones who are funding the current account deficit with capital inflows like India. So, oil importing economies which have current account deficits are the most vulnerable at the moment. I would steer away from those right now.
But that’s not to say that from a five year perspective they won’t rebound. When they rebound, it will be huge and a sudden rebound. You have to be positioned in those markets to ride those rebound when it happens.
Sectors: I would like at liquidity. Emerging markets by their very definition are illiquid relative to western developed markets. When liquidity drains out, the large cap liquid stocks gets hammered first.
So, you find that the banks, the large conglomerates and such like these are the ones that get hit first because they are the largest. And therefore potentially in the rebound, it would be those precise stocks, the liquid ones, which people will reenter and you will see the biggest upside potential. I would say banks are the best candidates right now to look at because a lot of emerging market banks are trading at price to book or even below one times price to book.
Then of course, as the rebound progresses and matures, three to six months into the rebound, I would start looking at consumer stocks precisely for the reasons you mentioned. So in India, for instance the auto makers are being bashed right now because tight credit flow has meant that people aren’t buying cars and two wheelers. But once the rebound starts taking place and the credit flow starts easing, those are the ones that will rebound first.
Raj Tanna, portfolio manager, JP Morgan Private Bank, EMEA
Our preference within emerging markets has been towards Asia.
Valuations in China are starting to look pretty attractive when you look at the headline level. I think the issue for us when it comes to investing in emerging markets is there are lots of China that you don’t want to own e.g. stocks of state owned enterprises, whether that’s in the banking sector, paper, the energy sector, partly auto sector. Our preference has always been when looking to invest there is to do it the active management route, do it through stock picking. And that absolutely is still the case.
You want good expertise, that is sort of make sure you are exposed to companies and industries that are good allocaters of capital, generating profit on that capital and also, then have good and clean corporate governance. It all comes back to stock picking.
The rest of Asia is also still very interesting, though not quite at an attractive level of valuation that you see in China. Places like Taiwan are very interesting in terms of some of the companies which have very clean balance sheet, very strong dividend and good exposure towards the technology sector.
The other factor is direct investing in emerging markets, not to discount the indirect investing, i.e. through western companies listed either in Europe or the US. There’s obviously a handful of companies in consumer staples in Europe and then also, in luxury goods, and in the auto sector where you are benefitting from that growth in emerging markets. Some of these companies now have half their exposure in terms of sales coming from emerging markets, and you benefit from that, a higher sort of growth profile, but you also manage to do it at more attractive valuations versus developing market peers.
Mark Mobius, Executive Chairman, Templeton Emerging Markets Group
Regarding which countries we are looking to in the future, we must mention the African countries such as Nigeria, Kenya, Ghana and a number of others where the prospects for very rapid growth are present.
Small cap stocks are going to be more attractive since the rise of the smaller frontier markets will contain many of the small cap names. In addition there are many small cap names in emerging markets which have been overlooked and thus present good opportunities.
Edward Evans, Emerging Market Equities Client Portfolio Manager, Schroders
One of the [advantages] of investing in global emerging markets is the diversification you get within that. You have got the far more developed markets like Taiwan and South Korea [which has now been elevated to developed]. And then you have the BRICS market, which are the heart of the case for emerging market. Of course, you have the dynamic universe of MSCI, which has been making changes a month or so ago and we are going to have Qatar and UAE now in this space, and Greece being downgraded. Before these announcements were made, what we always did, was opportunistically and on a stock by stock basis, we would invest off Index if we felt sufficiently strong conviction. For example we have been investing in Qatar within our core global emerging markets portfolio for a year or so.
Talking about China, we are actually finding a lot of interesting ideas not in the state owned enterprises, but for example in the Internet industry. In Russia, we tend to prefer smaller consumer-related names, domestic consumption plays, IT in particular more recently has been doing very well for us. Generally speaking we are tending not to like particularly the materials sector.
[Generally speaking] we have been finding the best ideas in the more domestic related companies, IT related companies and sometimes in financials sector as well, particularly that can be sometimes be a cheaper way of playing the domestic consumer than things like consumer staples, which in some cases have become quite expensive.
