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Shopping for growth: Where rated EM equity managers are finding bargains

The emerging consumer remains an unstoppable trend. Citywire talks to equity fund managers about the new themes fuelling the latest chapter in the story and the sectors that stand to benefit.

Shopping for growth: Where rated EM equity managers are finding bargains

LONDON - Covid-19 may have cast a cloud over markets but stories of success have shone through.

Forward-thinking companies have benefited by adapting to customers’ changing needs, said Citywire AA-rated Sara Moreno, manager of the PGIM Jennison Emerging Markets Equity fund.

‘Segments like grocery delivery, e-commerce, cloud computing, online video, online education, gaming, and online healthcare were early winners from the pandemic as consumers adjusted to lockdowns and social distancing,’ she said.

Disruptive technology

As a growth investor with a fundamental bottom-up approach to investing, Moreno looks to generate alpha by betting on market leaders. This is particularly relevant when such opportunities are tapping into the structural growth that emerging markets offer.

This leads her to take positions in companies with disruptive technologies, new product cycles, and within under-penetrated markets. Many of these ideas are currently being sourced from the healthcare, consumer, and technology sectors.

‘E-commerce companies, healthcare innovators, digital payments, cloud computing, communication, and streaming services are among the types of companies well positioned for today’s environment and beyond,’ she said.

Moreno namechecks MercadoLibre in Latin America as a prime example.

‘It’s the largest online platform in the region and registered 1.7m new customers from 24 February to 22 March. This is a 28% increase from the same period a year earlier, as customers moved swiftly online due to the pandemic,’ she said.

Turbo-charged trends

Citywire AA-rated Martin Schulz, manager of the Federated Hermes Emerging Markets fund, agrees the virus has acted like rocket fuel for many themes.

‘Covid really has been an accelerant and we’ve been very fortunate to be in companies and sectors that have benefited,’ he said.

He cites Alibaba and Tencent as two key holdings that have done well on the back of the global move into the online space, pointing out that a decade ago you’d be hard-pressed to find any investors predicting large technology firms would emanate from these regions.

‘The emerging markets have, historically, been places where investors were a little more value-oriented, with materials companies, mining, financials, and utilities,’ he said. ‘Now you have China, South Korea and Southeast Asia at the forefront of technology and innovation.’


However, Schulz said investors need to be selective during the portfolio construction process as there are plenty of challenges, along with the opportunities. Final decisions, therefore, depend on a combination of top-down and bottom-up analysis.

‘We’re looking for markets that are undervalued with the least amount of risk,’ he said. ‘In that vein, Southeast Asia is probably the most interesting place to be, particularly within markets such as Vietnam.’

From a bottom-up perspective, the objective is finding companies that have an accelerated earnings growth, strong balance sheets, and a clearly defined growth strategy.

‘We focus on companies that have the ability to really look into the future and grow their earnings – not just for the next year or two, but over three to five years,’ said Schulz.

At present, he favours stocks within technology, healthcare, and communication services in his hunt for growth companies.

‘Industrial space and transportation are probably places that investors should be looking at for the next six to 12 months because that’s where you’ll see the benefit of the upturn in the global economic cycle – despite what’s happening with Covid,’ he said.

Consumer bonanza

Citywire AA-rated Andrew Dalrymple (pictured), who runs the Aubrey Global Emerging Markets Opportunities fund, agrees that choosing the right sectors has made all the difference when it comes to returns. His fund has always been focused on e-commerce and services, especially those accessed by the internet.

‘Throughout the disruption, about 60% of the fund has been in China, which is strong in this area,’ he said. ‘It was also the first major economy to see a return to some sort of normality.’

Those businesses with online offerings have succeeded, but other areas have struggled. ‘The worst are the cyclical old economy sectors, such as energy, and those with high cost bases which are hard to reduce in tough times, such as traditional retailers and airlines,’ he said.

However, given how strong the new economy has performed this year, Dalrymple wouldn’t be surprised to see a cyclical revival, if, or when, the world recovers from the pandemic. Nevertheless, his fund is exclusively focused on the consumer, so he can’t access energy, manufacturing, or mining.

‘Our experience tells us that the best, most consistent, and most enduring opportunities within emerging markets are in the consumer sector, so we will not be chasing short-term sectoral shifts.’


Dalrymple only buys growth stocks.

‘We define these as having EPS growth of 15% or more,’ he said. ‘At present, the fund is heavily focused on China, and also India, which accounts for 26% of the portfolio.’

He favours both because their growth remains strong and the politics stable, with opportunities that are superior to other areas.

‘The fund is usually quite concentrated,’ he added. ‘We see no need to spread the portfolio widely as it’s seeking to maximise returns in the best markets.’

Dalrymple also thinks the consumer opportunity in the emerging markets remains compelling.

Focus on Asia

‘Asia contains half the world’s population,’ he said. ‘They work hard, save hard, and are upwardly mobile. We are concentrating on finding companies providing products and services to make people’s lives more comfortable, convenient and congenial.’

He suggests such businesses tend to be much more enduring, and far less cyclical, as well as being less economically sensitive. For example, irrespective of the outcome of trade talks between the US and China, unless there is mass unemployment, he predicts little impact on Chinese consumption.

‘In many respects, and certainly if you look at the performance of our fund, there is very little correlation with emerging market economies,’ he added.

This article originally appeared in a supplement focused on emerging markets published with the October edition of Citywire Selector magazine.

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