Emerging markets have been somewhat out of favour for the past 18 months or so, thanks to the unwinding of the Federal Reserve’s quantitative easing programme and a series of country-specific crises.
Of the four most well-known emerging markets, only India has currently got investors excited again having boomed in the past year thanks to positive economic expectations following the election of Narendra Modi in May last year.
However, Ross Teverson, who heads up the Global Emerging Markets team at Jupiter, has a positive outlook that all of the traditional ‘BRIC’ emerging market countries – Brazil, Russia, India and China – are presenting opportunities despite their diverging fortunes when viewed from a macro economic standpoint.
For example, sentiment for Chinese stocks has been littered with concern about the potential for banking and property-led crises as well as slowing growth.
Russia is embroiled in its most tense relations with the west for a generation and subsequent sanctions have pushed its economy into recession.
Brazil has been a huge loser from the oil price plunge and fall in demand for other commodities.
But Teverson, who also runs the Jupiter Global Emerging Markets fund, says all these countries are giving the Jupiter team some compelling stock-specific ideas, most recently in Brazil which has seen a fall of 32.04 per cent in its stock market over the past six months, according to FE Analytics.
Performance of the MSCI Brazil TR index over 6 months
Source: FE Analytics. Cumulative returns with income reinvested, bid-to-bid and rebased into sterling
Worries over Brazilian stocks have mounted recently amid escalating protests around corruption of the state oil company Petrobras, where high ranking politicians are among those alleged to have taken cash bungs.
The Brazilian real is now at its weakest for more than a decade and currently the worst performing of any emerging market currency, but Teverson says these headwinds should help him invest in a number of Brazilian companies that he thinks will eventually recover.
“Everything that is happening in Brazil from a top down standpoint – the Petrobras scandal, the attempts to balance the government’s revenue position – can generate lots of interesting opportunities for us as equity investors,” Teverson said.
“I don’t normally start with a macro economic view but sometimes these concerns cause indiscriminate selling and so can provide good buying opportunities. I’m currently doing a number of calls with Brazilian companies and the negative headlines and the selling that results are creating potential opportunities.”
“Despite the scale of the Petrobras scandal – we are talking about billions of dollars here in kickbacks with a lot of very important people implicated – Brazil should bounce back. The currency weakness should also help to re-establish the competiveness of exporters,” he explained.
“I think Brazil in many ways will be better off as a result of what is happening. Longer term it has a strong growth story and I believe the market has fallen too much on short-term concerns.”
Particularly he says he sees very interesting valuations in the education sector.
“Education stocks have been sold by many investors on the back of concerns around financing for student loans. The changes to funding should be a short-term response to fiscal pressures the government is under. Longer term I think there is still a case for education stocks.”
The manager is also keen on some Indian stocks although he thinks that some areas have started to look expensive, after investors bought Indian equities following the election of pro-business reformist Modi.
“India is a market where we find a number of compelling opportunities, where we think there are a number of tailwinds from the reforms that Modi is putting in place,” he said.
“As an example, one of the largest marketers of petroleum products in India which refines and markets petrol and diesel, has seen a huge increase in cash flow generation and we consider that has not been reflected in the share price,” the manager pointed out.
“Also there are some small and medium sized companies which could offer us exposure to rising consumption. For example, there is a relatively undiscovered film and television production company in which we see good prospects for growth that we don’t think are reflected in the share price.”
However, Teverson believes that not everything in India is attractively priced with quality consumer staple names having already seen huge rises in their share prices. He adds while there is now a lot of enthusiasm for Indian stocks, it may take time for the Modi reform to feed through into earnings for some companies.
The manager is also looking at another battered BRIC: Russia, which saw its stock market fall 50 per cent peak to trough last year only to bounce back rapidly this year.
Performance of index over 1yr
Source: FE Analytics. Cumulative returns with income reinvested, bid-to-bid and rebased into sterling
“In December we bought into an oil company when we saw its shares sold very heavily on the back of the falling oil price but I thought the market were wrong,” Teverson said.
“There was a lot of attention being paid to the falling oil price and not so much recognition to the fact that the decline in the rouble was providing a hedge [i.e. offsetting risk] by reducing the capital expenditure burden in US dollar terms. Since then the share price is up about 40 per cent despite the oil price being about the same level.”
The oil company represented about 1.5 per cent of the fund when first bought but Teverson has recently sold out of the holding. However, he still has Russia exposure through a company which produces nickel and copper.
“It currently has a high yield, about 10 per cent dividend yield, and normally that would suggest that earnings or cash flow are going to deteriorate but we believe it is going to improve.”
While emerging markets may offer selective opportunities, following a challenging 18-month period, investors should consider the higher potential risk associated with these countries. The broader market may continue to view these emerging economies with caution and returns are likely to remain volatile.
Important information
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This commentary is for informational purposes only and is not investment advice. The views above represent the views of the fund manager at the time of preparation and may be subject to change. They are not necessarily those of Jupiter as a group and readers should be aware that they should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided, but no assurances or warranties are given.
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