Emerging and Frontier Markets: Ferreting out Neglected Value Opportunities

By Hamlin Lovell, NordicInvestor

Jupiter’s emerging market equity team of five fund managers and two analysts scour the globe to carry out on the ground, greenfield, research to meet with companies, competitors, and suppliers, and feel the pulse of local markets, societies and politics. This year trips have included China, Turkey, Mexico, Brazil, India and Argentina. Though the emphasis is on bottom-up stock-picking, the equities team also share ideas and macro views with Jupiter’s emerging markets fixed income and credit investment teams.

Jupiter’s Head of Strategy, Emerging Markets, Ross Teverson, is broadly constructive on emerging markets equities since the asset class remains relatively unloved and trades at a discount to developed market equities. He is most enthusiastic about picking stocks that are also at a discount to their emerging market peers.

Consumer staples are a prime example of the huge valuation dispersion in emerging markets. India’s Hindustan Lever trades at a PE of 50 but Turkey’s Ulker is on a valuation below 10 times earnings. Teverson is cognizant of a macro political risk premium in Turkish assets, but finds individual stocks attractive – and indeed exporters can profit from the economic crisis as they benefit from a weaker currency: Ulker’s distinctive confectionary is growing its revenues in markets such as Egypt and Saudi Arabia. Elsewhere in Turkey, he owns a lowly valued insurance joint venture between the UK’s Aviva and Turkey’s Sabanci, which has a strong runway of growth due to low insurance penetration. Limited access to financial products is a phenomenon seen in most emerging markets.

Frontier market banks with structurally high growth, strong returns on equity and good dividends are a core portfolio theme that also ties in with the UN SDG of financial inclusion. China’s banks make up the largest part of the benchmark’s financial exposures, but Teverson is not constrained by the index and prefers selected frontier market banks, such as Nigeria’s GT; Kenya Commercial Bank – yielding 9% – and Bank of Georgia (which is listed in London). “They are trading at the lower end of their historical valuation range”, he says.

Another core idea is, “technology enablers that facilitate autonomous or electric vehicles, cloud computing, or clean tech innovations”. The semiconductor memory sector appeals with valuations close to book value and below replacement value. Demand should be strong as these chips are essential for the cloud, autonomous vehicles, smartphones, and computers. But the real game changer is that consolidation could engender more supply discipline – and end the feast and famine commodity-type economics that has plagued the industry for so long. “There are now only three companies making high speed DRAM chips: Samsung and Hynix in South Korea, and Micron in the US, which raises hopes that a pattern of alternating between high and normal profits could replace swings between profits and losses”, he says.

Taiwan’s Bizlink is another lowly valued firm that is tapped into growth markets. It supplies high quality docking stations that enable laptop connections to peripherals and dual monitors, and also provides battery wire harnesses used by Tesla. “The firm trades at 12.5 times forecast 2020 earnings, and we expect both earnings growth and multiple expansion”, he adds.

Real estate is a smaller sector exposure where Teverson owns names spread across countries including Mexico, UAE, Russia and Indonesia. He expects Mexican factory leasing group Vesta will benefit from customers such as Nestle manufacturing in the low-cost country. Conversely, Dubai’s Emaar Malls is a trophy asset located at the base of the Burj Khalifa tower. It attracts both tourist spending and leisure spending in outlets such as restaurants, ice rinks, bowling alleys and cinemas, and has an e-commerce division too. “The stock yields 6% and “is likely to continue delivering growth in its rental revenues”, he points out.

Truly active management

Teverson is running a concentrated, high conviction book of around 50 stocks. Some 65% of the Jupiter GEM Equity Unconstrained SICAV fund is not present in the MSCI Emerging Markets Equity index; 84% is made up of stocks that are not held in the largest five peer group funds tracked by Morningstar, and the active share is 91%. This independent mindset runs through all of the team’s strategies: they do not actually run any mandates subject to tracking error constraints. Other mandates include a closed end fund investment trust listed on the London Stock Exchange.

Having two thirds of the fund in small and mid-caps does mean that capacity for the strategy is somewhat lower than it would be for a large-cap dominated emerging market equities strategy. At the same time, these equities are liquid, and there are 6,000 stocks that satisfy the fund’s typical liquidity test of USD 1 million average trading volumes per day.

ESG and Financial Inclusion

On recent roadshows, Teverson has been getting more extensive questions about ESG than ever before. The ESG policy for the emerging markets equity strategy has several strands. There is no negative screening – beyond the exclusion of cluster munitions that has been required for Luxembourg SICAV vehicles since 2009. That said, “we are unlikely to invest in a coal company, given that in pretty much every market there is a desire to reduce and phase out coal as a source of power generation” he admits. “Similarly, I do not see the tobacco business as being sustainable long term. There is no hard exclusion on alcohol and gambling, but “ensuring social risk mitigation and responsible practices would be important”

Indeed, company contacts – over 1,000 meetings and conference calls each year – and engaging with independent directors are important parts of the ESG approach. This can generate tangible results: engagement with Indian hospital operator, Fortis Healthcare, led the firm to introduce new independent board directors. Other engagements are ongoing: Teverson would like to see industrial automation group, HollySys, optimize its capital management by gearing up its balance sheet to fund buybacks and higher dividends.

In terms of impact investing, the largest current theme is the UN SDG of financial inclusion, seen in the aforementioned bank holdings. This objective appears to be immune to the polarization of politics: for instance, in South America, Brazil’s right winger, Bolsanaro, and Mexico’s left winger, AMLO, both want to improve financial inclusion. Over 55 countries have committed to financial inclusion, which seems set to become a megatrend. Jupiter has in October 2018 authored a paper “Financial Inclusion in Emerging Markets” which discusses the industry dynamics – including mobile payments – and key holdings, which include names in Brazil and Pakistan, and some Fintech plays, in more detail.

2019-06-19T22:25:19+00:00By |Categories: Emerging Markets, The Nordic Brief|