If you had to invest in just one country, which one would you pick and why?
Trustnet posed this question to the nominees for the FE fundinfo Alpha Manager awards in the emerging markets and Asia Pacific (ex-Japan) category. All four managers and teams who answered picked a different country but what they had in common was an emphasis on finding high quality but underappreciated companies.
Invesco’s Charles Bond: South Korea
“Given our contrarian and valuation-focused approach, we would choose South Korea as our favourite market,” said Charles Bond, who co-manages Invesco Global Emerging Markets. The fund has more than 15% in South Korea (a 4% overweight versus the benchmark).
“South Korean shares are some of the cheapest in the world, with both world leading businesses (e.g. Samsung and Hyundai) and domestic sectors (financials) trading at steep discounts to peers elsewhere in the world,” he explained.
“Many of our South Korean holdings trade on fractions of book value, often with underappreciated asset values (cash, land or stakes in affiliates) and dividend yields of 6%-plus. Dividend yields are compelling, not because pay outs are high but because valuations are low, with plenty of room for dividend growth if pay outs continue to rise, as they have been in recent years.
“Perceptions of lower corporate governance standards are the main reason for this extreme cheapness in our view. However, we believe minority shareholder rights have been improving over the last decade, with the government’s recently unveiled ‘Corporate Value-Up’ programme providing a significant stimulus for this trend.
“Emulating measures in Japan, the South Korean government is seeking to improve corporate returns on equity following the growth of domestic equity ownership, which should boost stock market valuations.”
GQG Partners: India
GQG Partners Emerging Markets Equity has a 30% allocation to India, held in 18 companies spread across eight sectors.
Rajiv Jain, Brian Kersmanc and Sudarshan Murthy, who run the fund, have been overweight India for some time, reflecting their belief that many companies in India are exhibiting “a high potential for durable future earnings growth while trading at attractive valuations”.
“We believe India is in the early stages of credit, property and infrastructure cycles that will drive economic growth, improve the country’s competitiveness on the global stage and increase the earnings power of select companies,” they said.
Fidelity International’s Nitin Bajaj: Indonesia
Nitin Bajaj, who manages Fidelity Asian Smaller Companies and Fidelity Asian Values, said he does not pick countries and that regional allocations in his funds are just an outcome of stock selection. “My process is to construct a portfolio bottom-up, owning a bunch of good businesses, run by good (competent and honest) management teams at a good price that offers ample margin of safety,” he explained.
However, he is finding a lot of opportunities in Indonesia, where the stock market “provides the best mix of growth, quality and valuations” that are integral to his investment approach. “As a result, the fund’s exposure to Indonesia is at its highest over 10.5 years of my management tenure.”
Bajaj has invested in a “mix of banks and select consumer companies that offer fairly high and sustainable returns while being available at reasonable valuations”.
“Indonesia has some of the strongest banking franchises with conservative underwriting culture. They have stable asset quality and benefit from structural growth as penetration levels are increasing from low levels,” he explained.
“The consumer companies we own in Indonesia are also high-quality franchises with market leadership. This gives them strong pricing power and ability to generate margins that are higher than global peers over the long term.”
AllianceBernstein’s Sammy Suzuki: China
Sammy Suzuki, head of emerging market equities at AllianceBernstein, picked China.
“While we do not expect a quick recovery at a macro level, China is home to over 700 listed companies only counting those in the MSCI index. The question for us is whether we can find attractive companies. With significant pessimism, the market offers very attractive yet overlooked investments,” he explained.
The AB Emerging Markets Low Volatility Portfolio, which he manages, is modestly overweight China.
“The transition towards green energy perversely should be positive for energy and materials given restricted supply. This would benefit commodity exporting countries. At the moment, we believe that investing in those commodity-exporting countries offers better risk/reward than investing in commodity companies,” he said.
Suzuki has a positive outlook for emerging markets more broadly as the twin headwinds of rising global rates and a strong US dollar moderate.
“Many emerging market companies are capitalising on structural trends such as innovation in artificial intelligence (AI) and digitisation, deglobalization and reshoring, changing consumption behaviour and the energy transition – often at lower valuations than their developed market counterparts,” he pointed out.
“Broader emerging markets should also be supported by low inflation that could drive more supportive central bank actions, while Asian markets should benefit from a mix of domestic policies and broad AI tailwinds.
“In the long run, as the global economy continues to shift toward a knowledge-based economy, we believe that companies with intangible assets such as network effects, human capital, research and development, and brands will continue to perform well. The portfolio continues to have a strong emphasis on these types of companies – those that are resilient to fluctuations in the global economy but at the same time have robust business models that allow them to earn healthy profit margins.”
In addition to the managers above, Schroders’ Robin Parbrook is also nominated in the emerging markets and Asia Pacific category of FE fundinfo’s Alpha Manager awards. He runs Schroder Asian Discovery and Schroder Asian Total Return.
Alpha managers represent the top 10% of managers running funds available to UK retail and wholesale investors, based on their ability to consistently beat their benchmarks and deliver risk-adjusted alpha (using the Sortino ratio).
The five highest scoring managers in each asset class category were nominated for an award based on their investment performance throughout their careers. Winners will be chosen based on 2023 performance alone and will be announced the week commencing 13 May 2024.