Beer, driverless cars and soy sauce: Where the best opportunities lie
Several emerging market economies are seemingly over the worst of the Covid-19 pandemic and are showing signs of life. Within these markets, some companies are trading at attractive valuations, offering investors an opportunity to diversify their portfolio.
In this Collection, we ask emerging markets managers Rasmus Nemmoe, FSSA Investment Managers; John Malloy, Jr, RWC Partners; and Alex Duffy, Fidelity Investments to nominate the one emerging market they think offers most value right now and one stock they like in that country.
Indian beer drinkers raise a glass to leading brewer
Rasmus Nemmoe, FSSA Investment Managers
We have the largest portfolio weight in India, but we don’t really look at it from a top-down perspective. Instead, the weight is the residual of where we find the best long-term investment opportunities, and India, with its solid companies and long-term growth potential, is a relatively straightforward country to hunt for quality companies in. United Breweries is one such example. It is India's leading brewery, with 55% volume of market share. It is now 47%-owned and controlled by Heineken.
Annual per capita beer consumption at just 4 litres (L) in India (compared to 33L in China, 60L in Brazil and 77L in the US) should grow rapidly as more than 200 million Indians will reach the legal drinking age over the coming decade. Following the alliance with Heineken, United Breweries has further entrenched its dominance in the market, particularly in the fast-growing premium segment (8% of industry sales versus 40% in the UK). The company’s iconic Kingfisher brand dominates the market, with sub-brands such as Kingfisher Ultra straddling higher price points. The introduction of Heineken and other global portfolio brands at premium price points further strengthens the product mix.
Russian tech company offers voice assistant, driverless cars
John Malloy, Jr, RWC Partners
We are growth-oriented investors. Therefore, we look for investments that have encouraging growth profiles at reasonable valuations accompanied by supportive macroeconomic dynamics. Russia, in our view, is an attractive emerging market at the moment. From a macroeconomic perspective, the oil price remains supported by curtailed supply due to factors such as a lack of investment by shale producers, a depleted rig count and a significant improvement in OPEC compliance. The normalisation of the global economy should drive demand over the medium term. As mentioned above, monetary policy remains accommodative while foreign exchange reserves are at robust levels.
Yandex is a Russian technology company. The company is the search leader in the country with 60% market share. The company’s growth profile remains attractive due to its launch of new features such as Yandex Video and voice assistant Alisa. Structural tailwinds such as the rising share of digital channels in Russia’s advertising market should continue to support the company’s earnings. Yandex is also one of the global leaders in driverless car technologies, which could become a crucial component of future transportation services. Furthermore, it continues to develop new verticals such as food and grocery delivery. At 25x forward earnings and a market capitalisation of $20 billion, the stock offers growth at extremely reasonable valuations. Current dynamics have resulted in strong performance year-to-date for technology stocks which could lead to muted performance in the near term. However, we think the growth profile of Yandex will likely result in strong performance over the medium to long-term.
Chinese soy sauce producer is a sound defensive play
North Asia, led by China, is spearheading the recovery from the recent crisis. Several factors underpin our conviction in the country, including strengthened demand for internet and technology related services and being home to many leaders in these industries. North Asia is also realising more long-term structural trends, such as urbanisation, rising incomes/evolving lifestyle with a clear trading up in consumer preferences which we believe will give them tailwinds out of this recovery.
Foshan Haitian remains a top pick within the portfolio. This Chinese soy sauce producer is a defensive staple and a clear leader in the industry, with little correlation to overall macro growth. Management owns over 75% of outstanding shares, ensuring interest alignment with minority shareholders. Its resilience was also proven throughout the recent crisis, as reflected in its 2Q20 results which greatly exceeded market expectations, posting double digit sales and profits in what was a challenging quarter.
Savvy investors know that one picks stocks, rather than countries or regions, and this is very much the case with emerging markets at the moment. Under the vast umbrella of emerging markets, several strong, innovative companies stand out and should be on the radar of global investors.
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