Investing in emerging markets: China, India and Poland

Darius McDermott 28/07/2022 in Asia/Emerging Markets

Rob Brewis, co-manager of Aubrey Global Emerging Markets Opportunities fund, joins us to share the growing consumer opportunity in emerging markets with a focus on both Chinese and Indian markets. Rob also touches on other opportunities further afield, such as a supermarket in Poland.

Please Note: Below is a transcript of the video, modified for your reading pleasure. Please check the corresponding video before quoting in print, as it may contain small errors.  

So, the fund is designed to tap into the growing consumer opportunity in emerging markets, with over half the portfolio in consumer discretionary and staples [companies]. Tell me briefly why you like this theme so much, and if you could give us one or two examples of this theme, that’d be great.

[00:32] Well, I think the growth of the consumption in emerging markets is one of the great and enduring long term growth stories in the planet really. But what is very important is to look in the right places. And the reason why I say that is because it’s a very varied universe, and consumers in different places want different things.

So, take two of the big countries in emerging markets, India and China. GDP per capita in India is $2,500 a head. Whereas in China, it’s now $13,000-$14,000 a head. Clearly, with these different income levels, people are going to want different things with their incremental earnings growth and their incremental wage increases.

To give you some examples, India has a much more basic level of things. It might be a first bank account or first apartment, or even something as simple as packaged food or beverage. One example we have in the portfolio is Varun Beverages, which bottles Pepsi and sells them across the region. The basic story long term is that servings per head in India are 50 per year, in Brazil they’re 500 and in the US they are 1,500. That is a great backdrop to have. There are lot of other good reasons why we like that, but you’re starting from that premise.

On the flip side, China is much more advanced, there we’re looking at things like travel – when the’re allowed – healthcare, wealth management… Eastmoney is one of our holdings and is one of the larger mutual funds companies, for example. So, very different things. In other words, you have got to keep looking in the right place.

Let’s focus our attention on those two big markets in global emerging markets, which are China and India. We’ll have a quick go at China first. So, China is still targeting a zero COVID policy and several cities have been in lock down on and off throughout 2022, something thankfully we no longer have to endure. How is that affecting consumption, particularly when you know that people are presumably less able to consume than they would if they were out and about? And do you see that policy changing or is that sort of their hard and fast way of going about it?

[03:16] It’s a tough one. Just to take a step back, one of the big drivers we’ve seen in the past decade or so in China, or in consumption in China, has been the fact that the very high savings rate that we all talk about a lot in China has actually been coming down, I think for a number of reasons. But firstly it’s [a] generational game, where there’s a younger generation of consumers who are much more willing to spend. But really, Covid has put a complete end to that trend, and for obvious reasons, people have been saving much more and spending much less. And that has clearly been a headwind to our consumer companies in China.

One thing you can say though, is there are still areas of growth even in that environment. Again, if you look in the right places. If you look at electric vehicles, for example, which are growing extremely quickly. BYD, one of our holdings, their revenues were up 16% in the first quarter. Other areas, like local brands in China are doing very well versus foreign brands, particularly in certain areas. Proya Cosmetics, a local Chinese brand again has revenue growth of over 30%. Both of these have continued even through the lockdown in the second quarter. So, there are areas of growth, if you look in the right places. But the ultimate thing that we will be looking for is a post recovery. There’s no sign of the zero COVID policy being relaxed. So, we’re not holding our breath. It will happen eventually.

We take a medium-term view on our companies, and it will happen eventually. When travel emerges from China at some point in the next few years, it’s going to be very interesting, but obviously that will take time.

And maybe then just a quick touch on valuations on those types of names and I don’t want you to pick on any, but just broadly, have their valuations reflected their short-term outlook?

[05:48] It’s a very good point. I mean, I think that we’ve seen the Chinese market recover a bit in recent weeks and the last month or two, and I think that’s partly because valuations have achieved levels that we’ve rarely seen, particularly for decent high quality growth companies that we look at, that have underlying growth dynamics, even if they’re a little bit suppressed at the moment. It is a very interesting time to look at some of these Chinese companies – we don’t quite know when the background will improve. The fact is that is very much reflected in the prices at the moment. So, a very interesting time for a lot of these stocks.

So then let’s go back to India. Again, another favoured area for you, a big percentage of the portfolio – circa 40% – in India. Like a lot of countries though, they’re expected to raise rates. We know that there’s a concern about food price inflation and in fact delivery of food because of poor harvests and concerns around Russia, Ukraine. How are your holdings in India faring up? And do you have any short-term worries or is it again a long term game?

[07:14] In general, our holdings have been doing extremely well in India. They’re focused in the right areas. The kind of businesses we own tend to be gaining any market share. They’re the more organised players that are taking share from the unorganised in the sector and have pretty strong pricing power. Most of them have been able to pass on most if not all of the price increases, but one thing that’s for sure is that there’s been derating in some of these over the last six months as interest rates have risen in India, as they have in the world.

The longer-term point I would say, is that we think that India is getting to grips with its inflationary past. I know it’s unusual times, but even in India the actual inflation rate is below the US and the UK at the moment, which is obviously unusual. But we also think it’s in a much stronger position. In previous times when [the price of] oil has had a rise like this, India has really struggled. Its external accounts are much more resilient than they have been.

The food pricing point you make is interesting because I don’t think people quite realise that India is by far the largest rice exporter in the world. I think it probably will be the largest wheat exporter in the world quite soon. Monsoons are still important in India, and we’ve had a number of years of very good monsoons, very good growing conditions. But, if you could picture a typical Indian farm, this has really all happened before they’ve even started to recognise and upgrade their farms. So, imagine what sort of food production India could have. And you’ve obviously got to remember, there are 1.4 billion mouths to feed as well. So, that doesn’t sound too inflationary for me from a food price point of view. India is probably in a much better position than people think.

So, you’ve lots of markets you can invest in. And we’ve touched on the two big ones where you naturally have two big portfolio weights, but outside of India and China, what other areas are interesting you, whether it’s from a growth or valuation perspective, where else are you focusing some of your time and efforts?

[10:04] When we look at the potential universe of stocks in our consumer world, the vast majority of them that come up still are in India and China. There’s a lot of opportunity there. But we are always looking for opportunities elsewhere. But we are very selective. At present, the biggest market exposures we have outside India and China are Vietnam, Indonesia, and Poland, interestingly.

Poland is an interesting one, it’s not a topic of the moment for emerging market investors, but we’ve had a very successful holding in a company called Dino Polska for over four years. And it just happens to be an extremely good business. It’s one of the country’s leading retailers. They operate in supermarkets, so medium to small size towns and villages will have a Dino Polska store there. It has grown revenues at 30% a year for the last six years consistently. And it’s still got a lot of Poland to cover. So, a really good example of a company that you can find when you know where to look and what you’re looking for, there’s really interesting opportunities everywhere.

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