Could pent-up demand in China spur the stock market in 2023?

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Hi, I’m Joss Murphy, research analyst at FundCalibre. Today I’ve been joined by Rob Brewis, co-manager of the Aubrey Global Emerging Markets Opportunities fund. Rob, how are you today?

I’m good, thanks, Joss. And how are you?

I’m very well, thanks. Bit chilly, but we can move past that! Let’s get straight to it then, Rob. Perhaps we can start with China which is the largest emerging market and one which has had certainly torrid 12 months. Are you still happy to invest there?

[00:37] Yeah, absolutely, you’re right. It’s been a tough period in China. But just to take a step back, I mean, we do invest in companies, not countries, and there are some really excellent, well-run businesses in China that we are very happy to invest in. That’s the first thing. I mean, the second thing really is, you know, we focus on the consumer, and that’s probably been the worst of all worlds this year. Consumer confidence is dire and for the obvious reasons and very much people are saving, not spending.

But I think you can’t get too down about that, and actually, when you look at the potential, you know, this something like $5 trillion worth of additional deposits built up and savings this year which have not been spent and have not been invested anywhere, and equivalent – I mean, if you think about that in, I mean, that’s almost equivalent of the entire retail sales that China did in 2019. So, it’s a huge number and if only a portion of that starts to be to be spent again, it could be potentially very interesting next year.

That certainly is interesting, but India is actually your largest country weighting. Is that market too expensive now?

[01:56] Well, I think that’s the sort of common perception, but I think we would disagree. I mean … you know, India’s up slightly this year. So, largely flat, if you like. Some of our stocks have … one or two of them have done a bit better. You know, we have one, Varun Beverages [Varun Beverages Limited] that has nearly doubled, well, has doubled this year.

But if broadly speaking the market’s flat, [but] earnings have been very, very strong. And our average growth is running at about 40% this year. So, actually, it’s potentially cheaper on average than it was this time last year. And, let’s face it, it’s still probably the most exciting emerging market story; very strong growth, inflation peaking and starting to fall – there was a very good inflation number just recently – and an investment cycle picking up. So, we would probably disagree with the consensus [and believe] that India is not expensive really for what you get.

That does make sense. This fund is looking to tap into emerging market consumer and the growth and consumption. Is there a cost-of-living crisis in emerging markets like there is here? Is the consumer still strong?

[03:08] Yeah, it’s an interesting question and the costs of living are up for sure, for consumers everywhere, as we know. But actually, probably the difference is wages have been growing in most emerging markets as well. So, people don’t feel it quite so badly. I mean, certainly at the lower end of the spectrum where daily living food and fuel costs are high proportions of your spending, I think they’ve suffered worse. And you look at the rural side of India, for example, which has struggled a bit. But the fact is that a lot of these costs are starting to come down now; I mentioned the latest Indian CPI [Consumer Price Index], which is back below 6%, which is largely because of food prices falling, which is good for that end of the spectrum.

And the other thing to remember is that emerging markets were never in our sort of ‘zero inflation, zero rates’ world that the developed world was. So, the shock has been much less. So yes, Indian inflation’s gone from four to six, but it’s not gone from zero to 10 as we’ve seen in our part of the world. So, it’s actually, you know … it’s not been nearly as dramatic, and I think that is … it’s definitely peaking off and actually looks better for 2023.

After India and China, Indonesia is your largest country weighting. It’s perhaps less well known among investors, so can you tell us what you like about it? What are the opportunities there?

[04:37] Yeah, it’s the biggest country in Southeast Asia, 250 million people, young population, GDP per capita at about 4,000. So, it’s well above India, but still a long way behind somewhere like China. And I think, you know, Indonesia has struggled a bit to attract its fair share of investment over the years. Yes, it has commodities which have helped, but it’s changed the labour rules recently, which has made it much more easy for people to invest in manufacturing and that sort of thing. And I think it’s starting to come through.

I mean, the other thing is the current government, when they first came in, introduced dramatic hikes in minimum wage for a number of years, and that was pretty tough for – and obviously it was good for the consumers – but it’s pretty tough for companies. We’re getting to the stage now where those dramatic changes are not happening, but, you know, the consumers are generally a little bit better off than they were, but it’s easier for companies. So, I think the profitability outlook for companies in the retail sector, we have one Sumber Alfaria [PT Sumber Alfaria Trijaya Tbk], which is the biggest operator of mini marts if you like, you know, the outlook for them is starting to look very good.

And moving away from Asia, if I might Rob, there’s recently been a change in government in Brazil. Do you think that that change is positive? Will this create more opportunities there?

[06:13] I think the new government has at least removed that uncertainty from … you know, we’ve been worried about the elections for the last year or so because, you know, it was close, too close to call. And we weren’t sure of the policies that either was going to bring. At least that is passed. We’re starting to understand the Lula [President-elect of Brazil] government and you know, it looks like his most … more populous tendencies will be reined in by a fairly middle of the road government, so, that’s good.

I think the bigger issue for Brazil is that it’s one of the ones that has had a real inflationary problem this cycle. And, you know, and interest rates have gone up to sort of 12 -13% again, you know, very high levels, which has really been very, very tough for the consumer.

But again, you know, we had an inflation number recently, which is half that level now, down to sort of 6- 7%. The inflationary sort of pulse seems to have just gone through the system now. And I think, you know, once that comes in, interest rates will come down. And I think the other thing that’s happened is that – particularly in our area of interest – the consumer stocks – you know, they’ve had a massive derating in the last year or so. And I think at some point in 2023 there’ll be an opportunity to really pick up some bargains there.

And to wrap up, could you tell us about one or two your holdings, please?

[07:51] Yeah, sure. I mean, I’ll give you one in China and one India. It’s probably the best. [The] first one I’d like to talk about is a company called Proya Cosmetics [Proya Cosmetics Co Ltd] which is… it’s the leading local skincare brand in China. It’s a very high value for money product. It’s built up a pretty good brand trust over the years. It’s still, it’s growing its share rapidly, but it’s still only at 4% or thereabouts; 80% online sales; very strong online marketing presence. But one thing about it is that it’s an example of a business that’s been really resilient through the last year or so in China. The stock price is actually up this year 12% or so, which is not a lot, but it’s an awful lot better than most others in China, and revenue growth has continued at 30% this year, which is really a fantastic result. And then going back to that, your first question, it’s one of the reasons why we still invest in China. There are plenty of these really high-quality businesses if you can find them.

The second one, just on India, is something called Eicher Motors [Eicher Motors Limited] which is a relatively recent addition to the portfolio. It’s a stock we owned from about 2015 to 2018. And it’s the maker of the iconic Royal Enfield motorcycles, which are the dominant premium end product in India. They’ve had a really tough couple of years, partly because India jumped the gun and introduced some really sort of European standard emission controls and, for various other reasons, the cost of the bikes went up quite a lot and obviously sales declined. The fact is we’re coming through that sort of tough phase. They’ve just introduced a new model, which is called the Hunter, which is a slightly cheaper version. I mean, it’s still 1800 quid for… on the road [model] but it’s still lower than the sort of 2000 pounds that you’d pay for the classic. But it’s attracting a younger audience and sales have been really good. So, it’s also starting to export. Exports are now 17, 18% of revenues and growing, so you might well see a few more of them dotted around the streets of the UK. But it’s a really strong position and one that we’ve … we’re pleased to be back into in the portfolio.

Well, thank you very much, Rob. That was extremely interesting. If you’d like to find out more about the Aubrey Global Emerging Markets Opportunities fund, please visit FundCalibre.com. Thank you.