There are plenty of attractive value opportunities in emerging markets but investors have to tread carefully, according to Fidelity’s Nick Price.
The FE Alpha Manager, who is the lead portfolio manager of the global emerging markets equity strategy at the company, believes stock selection is particularly important in today’s market environment and that some very cheap stocks are still likely to be bad investments despite their attractive pricing.
“I think generally the environment is not easy and that will be a broad statement across the piece. You have a number of domestic economies that are under pressure, the currencies have come off – that would be a statement applicable to a significant number of regions,” he said.
“It’s not that the opportunities aren’t there, you can look at various segments and see consumption growing quite nicely, but you’ve got to worry about the other guy and what they’re doing with pricing and how rational they are and how long they’ve been prepared to run a loss in order to get market share, and so forth.”
Performance of indices over 3yrs
Source: FE Analytics
One area of emerging markets that Price is steering clear of at the moment is Latin America.
In his Fidelity Emerging Markets fund, he only has 2.7 per cent allocated to the region, making it by far the smallest regional weighting in the portfolio.
It is well known that plummeting commodity prices have had a particularly negative impact on the economies in the region, especially on its two ‘powerhouse’ economies – Mexico and Brazil.
Price says that, even when putting commodities to one side and focusing on the consumer sector, Latin America isn’t offering investors much value at the moment.
“There are some exceptions but the broad consumer sector tends to have relatively high multiples in stark contrast to, for example, the financials and banks, so I think there’s quite a dichotomy between the two,” he explained.
“The Mexican market is expensive – it’s expensive because people are seeing it as somewhat of a safe haven. But in general, whenever I try to look for value it’s extremely difficult and it’s a region we’ve got very little exposure to.”
The manager says that the root of the issue lies in the lack of progress seen in the structural reforms across Latin America, and he doesn’t expect to see an economic recovery in the likes of Brazil in the near future.
Brazil’s economy slipped into recession in the second quarter of this year following a combination of the ongoing Petrobras corruption scandal knocking consumer confidence and high levels of inflation, which led to the country’s GDP to contract by 1.9 per cent since the first quarter.
“My prognosis, when I look specifically at Brazil, is that I think it will bumble along at very low levels of growth. It’s had negative GDP growth this year and it will probably suffer low real GDP growth for the next two or three years unless we see a very big recovery in the commodities space, which I don’t think is likely,” Price said.
“But that said there is value to be had – you’ve seen some very strong franchises in the financial space which are trading below global financial levels and, having lived through the global financial crisis and run funds through the global financial crisis, I think it always sets the bar in terms of stock valuation.”
Fidelity Emerging Markets’ second-largest sector weighting is in financials at 24.6 per cent, while its largest weighting is in consumer products at 38.4 per cent.
This seems to have worked well for the five FE Crown-rated fund during the markets’ recent bout of volatility, as it has outperformed its sector average and MSCI Emerging Markets benchmark over the last three and six months, as well as year-to-date.
Performance of fund vs sector and benchmark in 2015
Source: FE Analytics
One financials company that Price is particularly pleased with is the fund’s fifth-largest holding, AIA Group, which is a pan-Asian life insurance company.
“In the consumer segment I would argue there is a bit of a dichotomy. There are some opportunities that have been thrown up and indeed we have looked to take advantage of that, so while AIA is a company that sits in the financial space, it sells insurance products and protection products to people out in Asia, it’s very much consumer-facing and that came off quite nicely in the last couple of months so we’ve been adding to that,” he said.
“It was certainly trading at the 20 per cent RSI [relative strength index] so that provided an opportunity, as did Midea which is a Chinese white goods manufacturer so we have looked to add to those on that very basis – both because valuations are extremely attractive and they’re becoming extremely oversold.”
While the results from the portfolio have been strong recently, Price warns that emerging market investors still need to watch their footing.
“There are businesses I wouldn’t want to touch in a million years, regardless of your view on the oil price, simply because of the way in which they’re managed, certainly with the likes of Petrobras, even though it looks extremely attractive on a price-to-book basis,” he said.
“The reporting season has been a good one but it’s an extremely tough environment and I don’t see anything that’s likely to get better in the near term. I think it will remain a tough environment, but one in which good companies will continue to move forwards in real terms.”
Fidelity Emerging Markets retail fund has a clean ongoing charges figure (OCF) of 1.07 per cent.