|Summary: Emerging markets, from a macro perspective, can be high-risk investment propositions. Yet, for fund managers such as Aberdeen Asset Management’s Chris Wong, emerging markets are a treasure trove of undervalued stocks with big potential.|
|Key take-out: Brazil, Russia, India and China were the hottest spots for emerging market stock pickers, but now professionals are actively investing beyond the so-called BRIC nations into markets offering the potential of higher-growth returns.|
|Key beneficiaries: General investors. Category: Shares.|
Emerging markets – a generic term for a host of countries as diverse as Bangladesh and Brazil – remains one of the sectors where individual retail investors operate at a disadvantage.
At their best, specialist fund managers can use their networks and valuation skills to find great growth companies that will transcend the limitations of language, regulation and currency risk that will justifiably scare off all but the most determined private investors. One of the biggest institutional names in emerging markets is Aberdeen Asset Management.
Singapore-based Chris Wong is a manager of the $1 billion Aberdeen Emerging Opportunities Fund, one of the most powerful funds in the emerging markets arena.
Although emerging markets offer great promise – and historically can offer years where the numbers literally take off with 30% or better returns – they also offer elevated risk and natural disasters (such as SARS in the late 1990s) or conventional political or fiscal crises will regularly sweep these regions.
For veteran emerging market specialists, it all comes down to picking the right stocks at the right time in markets which have reasonable levels of liquidity and regulation. Wong and his team invest across 25 countries, with the majority of their holdings in Asia.
James Kirby: Chris, you operate a billion-dollar fund – fund managers notoriously chase the same few companies in emerging markets. How can you avoid that?
Chris Wong: Well, we chase good-quality companies. I would not agree that global managers generally have the same stocks, but it’s true on a relative basis, from a liquidity standpoint, there are not many big companies in emerging markets: Then usefully some companies trade on low price earnings ratios. We have a minimum size company we will invest in at the Aberdeen Emerging Opportunities Fund; they are large-cap stocks – that is, at least $2.5 billion market capitalisation.
JK: There is a sense of money draining out of emerging markets and back into developed countries. That was behind the poor performance for most emerging markets in recent times. How do you deal with it?
CW: This is a phenomenon for maybe the last year-and-a-half. There were certainly some fiscal problems in key emerging markets that we invest in. In our case also, we deviate substantially from the benchmark. (The MSCI Emerging Market index $A unhedged).
But you must remember the growth rates in emerging markets are stronger than developed (markets), even if they are not as strong as they used to be. Also, just now, the flows are stabilising. I would say from a risk reward perspective emerging markets are now well supported.
JK: Is the notion of emerging market settled, or do the actual country components change from year to year ?
CW: Well, some emerging markets are no longer what you could call ‘emerging’. I’m thinking of South Korea, for example. Then you have newer markets such as Myanmar or Nigeria or Bangladesh. But I would not automatically say they are like South Korea 20 years ago. The fact of the matter is that some emerging countries will not – not ever- achieve developed status. Some of these countries will not make it.
So we concentrate on what we can control. We can’t control the outbreak of disease in a region, or a major macro factor such as the wider impact of the US Fed tapering program. The only thing we can control are the companies we pick – the people, the balance sheets, cash flow and the integrity of the board. These are more critical items to us than which markets are emerging or not.
JK: Still, though, you have to assess key countries – you have a 6% weighting in China for example. Why has the China stockmarket been such a poor performer?
CW: If you were to track the last 10 years China consistently manages to achieve a GDP of 7% plus and yet the stockmarket, such as the Shanghai Composite Index, has not performed at all.
There are exceptions like internet and gaming stocks, for instance, but in general China’s big companies can be very different from what we are familiar with as investors elsewhere.
If they are state-owned enterprises they are run for the ‘greater good’, not their shareholders. Among private companies they have a huge emphasis on relationships which can change very quickly. One day a relationship can be powerful and the next day it’s over. It might be that somebody gets caught for corruption. We are extremely sceptical in this market.
So often we find other ways in – such as through Hong Kong (where the fund has 9.5% of its assets) or even through a US listing. For example, we have a holding in Yum brands, which in turn has 70% of its business in China – even though it is a US-listed company.
JK: That all makes sense, but for how long do you think the China stockmarket will underperform?
CW: Well, it would greatly enrich me if I knew the answer. Look, it’s an adjustment period. The government knows they can’t have unabated credit growth, they know they must nip it in the bud to avoid a Lehmann-like crisis … so it’s a period of some pain. There is a major change from exports to domestic consumption, and that shift is never easy.
JK: Are fears over the China banking system justified?
CW: Well, we don’t own any Chinese banks, and we do worry about the shadow banking system. Like everyone else we are trying to estimate how important it is. [The shadow banking system is a term for the unofficial credit market inside China].
JK: How closely do you follow the benchmark index, in this case the MSCI Emerging Market Index?
CW: Christopher Wong: We operate quite differently than the index – you’ll find we are underweight in North Asia, Taiwan, Korea and Russia. Then we are overweight Brazil, Mexico and Turkey – our choices are always ultimately driven by our views on companies. You see in Russia, for example, it is very difficult to get quality companies. Having said that, we do have a significant holding in the energy group Lukoil.
JK: Over three and five years you have beaten your benchmark … but not in the last year. You did 5% and the index did 11%. What happened?
CW: It was not stellar – you know it was a perfect storm. As I said, we don’t follow the index that closely so we found that our big position, Brazil, was hit with a range of difficulties and we had issues at the same time in India.
JK: How’s it looking for the year ahead? You’ve a long-term average of 11% per annum.
CW: On an annual basis we deliver a high single-digit return. We’ve had years of 30% plus, and bad years. All I will say is that, on a valuation perspective, emerging markets are more attractive than developed markets and you have to weigh up they had a hammering last year.
JK: Tell me about one of your most interesting holdings … a company we may not know in Australia.
CW: I might mention TSMC - Taiwanese Semiconductor. They are one of the biggest operators, what they call ‘foundries’ in the world. They are now in the same league with Intel – it’s a global business out of Taiwan – and they are a great company working with all the chip designers that in turn feed into the new generation of smart devices – the smartphones and iPads etc. – that are really changing the world. That’s the sort of company we love to find.
JK: Thanks Chris.
This is an edited version of an extended interview with Chris Wong – the comments published are not financial product recommendations and may not represent the views of Eureka Report. To the extent that it contains general advice it has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.