Emerging Markets Podcast – 25 March 2020

March 26, 2020

BY Eric Anderson

With the COVID 19 pandemic and oil price volatility remaining extremely fluid, we wanted to give you a quick update on how things are looking on the ground across the key areas in the Emerging Markets.

In our latest podcast (~10 minutes), Eric Anderson, the Portfolio Manager of the Milltrust Global Emerging Markets Fund, provides his thoughts and conveys the main messages from locally-based investment teams.

Listen to the Podcast here.  Please note disclaimer below.

Key takeaways:

  • Overall, there are signs that the virus has, for now at least, peaked and been contained in China, Hong Kong, Singapore, Taiwan and Korea which points to the probability that Asia will be the key driver for the eventual recovery of the world economy.
  • Emerging market governments are showing us (for the most part) that they know how to manage a crisis, even if the initial reaction from China was slow.  Their co-ordinated government system is generally faster, more flexible and adaptable because they have to deal with crises on a regular basis.
  • In China, we are seeing early signs of recovery and continue to hold the view that consumption in China is very likely to follow a sharp V-shaped trajectory, which is in stark contrast to consensus expectations of a slow and gradual recovery.  The Chinese are largely back to their everyday lives except for those in Wuhan (ground zero for COVID-19). In Shanghai, where our investment team is based, all public facilities have reopened, there is a lot more traffic on the streets and the provincial government has publicly encouraged people to take their masks off. Anecdotally, many companies have been guiding to expect things to be back to normal by May or June.
  • In Brazil, the team are very bullish on the domestic themes in Brazil and have therefore been increasing their exposure to names correlated to the Brazilian economy, especially in retail, logistics and education.  The Brazil economy still has a lot of room to grow, a big unemployment buffer and all-time low interest rates.
  • In Korea, there are a number of Korean businesses that will benefit from the current situation; online shopping, as an example, has grown exponentially; telework has started to become wide-spread, and telemedicine, which used to be difficult to implement due to the strong opposition from the existing medical system, have also begun to operate.
  • In India,  the whole of the country is on lock down for 21 days which is positive as India moves in line with the rest of the world, allaying fears that they would move too slowly.  The impact on earnings will be significant for most businesses in India but we take comfort from our heavy exposure to consumer staples and some major industry disrupters that are likely to continue growing at superior growth rates and are better insulated from the mitigation efforts.
  • Russian equities are currently trading at a very cheap 5.1x P/E, while offering an incredibly high dividend yield of 11.0% for 2020.  Russia is in an oil price war with Saudi Arabia although they are arguably in a more comfortable position versus the other oil producers.
  • Across Africa, valuations are trading at more than a three standard deviation discount from their 7 year averages, while still offering solid dividend yields.  The South African Rand has also blown out and is over 20% cheaper than its long-term average which provides a good entry point to invest.

The Milltrust Global Emerging Markets Fund benefits from having over 150 investment professionals based locally in their region of expertise, they have over 2,000 years experience and have over 6,500 meetings a year with corporates, decision-makers, government officials, etc..  The information edge that this brings us allows us to understand how companies can operate their businesses in this environment and gives us added comfort that we are aware of the latest developments on the ground and therefore positioned appropriately.  The portfolio currently trades at a P/E level of 11 times with an average long-term earnings growth rate of 20.1% vs. 12.0% for the MSCI EM index (Source: Bloomberg).

Our high conviction companies in our Emerging Markets Fund represent strong high quality businesses that will likely be the first ones to bounce back once things settle down.  What is absolutely clear is that the current valuations of the EM equities asset class have brought about an incredible buying opportunity.

Disclaimer:  Intended for qualified investors only.  Any views expressed in the PODCAST are those of the author(s), are based on available information, and are subject to change without notice.  Certain data provided is that of a third party. The data relating to the Milltrust Global Emerging Markets Fund is sourced from Bloomberg as of close of business March 25th 2020.