Three reasons to consider emerging market equities today

Hello, I’m James Yardley, and today I’m joined by Rob Brewis Elite Rated manager on the Aubrey Global Emerging Markets Opportunities fund. Rob, thank you very much for joining us today.

[00:12] Thank you for having me.

Rob, I mean, where to start? I mean, I’ve been reading recently, India has surpassed the UK as the fifth largest economy in the world. I’m kind of surprised it hasn’t happened sooner, to be honest, but the fund has a significant weight in India. So, what’s the appeal and the opportunity there?

[00:34] Yes. It’s an interesting point where India has just become the world’s the most populous country in the world, and yet it’s still only fifth on the economic league table. But, you know, and that’s with a GDP per capita of about two and a half thousand dollars per head at the moment. So, imagine what it’s going to be like when it’s 5,000 [dollars] or so, which we probably expect by the end of the decade. It’ll certainly be the third largest economy and probably the fastest growing for that period and sometime afterwards. 

But yeah, I mean, just put it in context, you know, India has been a laggard. It was the same GDP per capita as China in 1990, and clearly China has forged ahead. But I think, we really feel that this is India’s time now. There’s a few problems that have been ironed out or are being ironed out. Infrastructure, which was always terrible, is really coming on. You know, corruption, which is much improved for various reasons. Technology and tax structures and that sort of thing. India is now a viable investment destination, which it hasn’t been really for most of the time I’ve been looking at it. So, I think there’s huge scope for catch up. 

But yeah, I mean, the opportunities … India is still a low-income country, so the opportunities are more at the basic end of the spectrum. So, you know, we’re looking at food and drink companies, retail, property, early sort of financial services, etc. I mean, you know, one of our best performing companies – and largest – continues to be a company called Varun Beverages [Limited] , which is a … they’re a Pepsi bottler. So, it’s something that people want. But it’s quite … it’s not a cheap item for the average Indian, but it’s now becoming more available. So, the growth there has been fantastic. So, that’s kind of where we see the opportunities.

And what is your sort of view on the valuations in India at the moment? Because India is sort of famously always quite an expensive market, but of course that’s for good reason, because people know about the long-term potential there.

[02:56] I think that’s right. But yeah, I mean, we’ve always taken the view that, valuations: you get what you pay for. And I think the quality of the growth opportunity and the companies in India demands premium valuations and the returns that the companies are generating. 

But having said that, also, you know, India’s had a good couple of years – not so much this year – but the last couple of years, it’s performed relatively well. Yeah, I think things probably did get ahead of themselves maybe six, nine months ago. The fact is, you know, the market’s gone sideways since then, and earnings are still growing very strongly. So actually, you know, we think valuation issues are not really a problem anymore. I mean, it’s back to its sort of normal level, normal premium if you like, to somewhere like China. But actually, it’s by no means unreasonably valued at the moment.

And the fund has a small weight in financials. How have emerging markets and emerging market banks done, in wake of the SVB blow up and the Credit Suisse blow up?

[04:07] Yeah, <laugh> I think it’s been fairly irrelevant to most EM [Emerging Market] banks to be honest. I mean, in most EM countries, the problem has not been excessive lending or whatever it was that plagued SVB and well, Credit Suisse [although] I’m not quite sure what was going on there, but it’s really been [about] under-lending in many ways. You know, the trend in credit growth has been very subdued, actually. I mean, the good news is that it’s picking up a bit, certainly in India, even in China, there are signs of credit growth picking up, which is you know, has been in the doldrums for a while. And elsewhere, it’s a mixed bag, but really no major pressures in the system that we can see.

I mean, our exposure, as you say, is limited to those banks that are more focused on the consumer and consumer lending. And, you know, one example is Bank Rakyat [PT Bank Rakyat Indonesia Tbk] in Indonesia, which is a sort of a dominant micro-lender there. And, you know, they’ve just come through a difficult period for their borrowers – but they’ve come through you know, pretty well unscathed and continue to be in a very strong position. So, I think it’s a very … we’re pretty relaxed about most EM financials anyway.

And what are your thoughts on China at the moment? I mean, it’s obviously a key part of the emerging markets index, how is it coping now? I mean, is it benefiting of course, from the reopening? 

[05:46] Yeah, I think yes, China I think is going to grow quite nicely this year and possibly the next. I mean, it’s coming from a very low base, obviously, but we can easily see, you know, 6 – 7% GDP growth in China this year. And that is just as it recovers, and it comes out. Now, I mean, how quickly that’s going to happen is hard to say, and I think, you know, there’s been a lot of, well, psychological damage, I would say, over the last two years, particularly for the consumer. And that’s going to take time to normalise. But I think, you know, we are seeing that at the wealthier end of the spectrum.

I think the middle market in China is still worried about jobs and income growth. So, it’s going to take time for the economy to recover and [for] that confidence to come back. But yeah, we’re pretty optimistic about China for the next year or so. Yes, longer-term structural issues, as you say, US / China relations, demographics, of course, headwinds longer-term, but I think those aside, I think the next year or two are going to be pretty good for China.

And some commentary has said that emerging markets is one of the most mispriced regions at the moment. Would you agree with that, is now a good entry point? Or what’s your outlook going forward?

[07:17] Yeah, I think you know, valuations are cheap. But you could have possibly made that argument for quite a lot of the last 10 years or so when emerging markets have, you know, serially underperformed. And it’s not enough, is the answer, being cheap. But I think there are some really positive signs that that might be changing. 

You know, firstly, I mentioned China and you know, that recovery is important. It’s a big chunk of the emerging market world, as you rightly say.  And I think that’s gone from being a real negative to a positive. And it has trade implications as well for the rest of emerging markets, where China is a big trading partner. 

You know, secondly, you’ve got India, which we mentioned earlier, and, you know, that I think is going to be, it’s the fastest growing large economy in the world. I think in five years’ time, it will start to dominate the emerging market world in terms of stock markets and indices and so on. 

And then thirdly, I think the move of people to diversify their manufacturing bases out of China: actually the main beneficiaries of that move are other emerging markets, really. And whether that’s Mexico or Indonesia or Vietnam or wherever it is, I think it’s extremely positive for those countries and investment in those countries. 

And then, finally, I think most of emerging markets are – the big ones anyway – are in pretty good shape. You know, their external accounts are not horribly imbalanced, their currencies are pretty stable, inflation’s not been a huge problem – but where it has been a problem, it’s becoming less of a problem as inflation rolls over. So, and then add to that potentially a peaking in US [interest] rates and a softer dollar, and actually, that’s really starting to sound quite interesting for emerging markets. And as you say, you’ve still got the valuation argument to back that up. So yeah, so we’re optimistic for the next five, 10 years or so.

Well, thank you very much, Rob, a very strong case for emerging markets there. Thank you for joining us today.

[09:34] My pleasure. And thanks for having me.

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