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Marshall-Lee: The emerging markets I’m backing and avoiding

29 June 2015

The head of emerging and Asian equities at Newton says the need to be selective when choosing between different emerging market countries is crucially important.

By Joshua Ausden,

Head of FE Trustnet Content

  India and the Philippines are far and away the most attractive countries to put your money if you’re an emerging markets investor, according to manager of the Newton Global Emerging Markets fund Rob Marshall-Lee, who says Russia and Brazil should be broadly avoided for the time being.

Marshall-Lee (pictured), who was recently appointed head of emerging and Asian equities at Newton following a strategic review, says the divergence between the most and least attractive countries and sectors has never been greater. This calls for high levels of selectivity, he argues.  

“All countries are not alike, which is why being selective is so important when you invest in companies situated in emerging markets. There are countries like India and the Philippines that look attractive to me right now, whereas I am avoiding Brazil and Russia,” he said.

“Similarly at an industry level, I think banks and commodity1 producers have big problems but I think that a number of internet companies have massive potential.”

Like all managers at Newton, Marshall-Lee considers long-term macro-economic themes when investing. While picking the right companies is of course crucially important, knowing which countries have sound fundamentals and understanding how various themes will impact them is the best starting point, says Marshall-Lee.

“We see India and the Philippines as two of the best in the world on a five year perspective,” he said. “We have 28 per cent invested in India and have 10 per cent in the Philippines2.”

On the subject of India, he said: “India has done well since Narendra Damodardas Modi, the 15th and current prime minister of India, came into power but this is only part of the story. It will take time for his reforms to come through. From our perspective it’s still early days.”

“The dynamics of its population are very positive, and on a five year view we see it as having the best growth potential of any in the world, particularly as it is just emerging from the trough of an economic cycle.”

Newton Global Emerging Markets has been overweight India relative to the benchmark since 2011. Marshall-Lee says this was initially painful, but has been a big driver of the fund’s outperformance in recent months.

The MSCI India index returned more than 60 per cent in USD total return terms between 1 September 2013 and 13 April 2015. It has suffered a poorer time of late, but the manager says he has been using this as an opportunity to top up his exposure.

Performance of indices since 1 September 2013

 

Source: FE Analytics, performance with dividends reinvested between 1 Sept 2013 and 15 June 2015

On the subject of the Philippines, Marshall-Lee said: “The Philippines has just gone through 15 years of deleveraging [lowering its debt levels] in the aftermath of the Asia crisis in the late 1990s. Its current account is very healthy driven by the repatriation of earnings from overseas workers.”

“The government is much more efficient than it was and its population dynamics are better than in almost any market in the world for the coming few decades.”


 

The MSCI Philippines index also enjoyed a strong 2014 and early 2015. Marshall-Lee says he isn’t finding it too difficult to find companies of adequate quality for his portfolio, though accepts liquidity isn’t as strong as it is in more established emerging market nations.

Conversely, he sees Brazil and Russia as simply too risky to invest in at the moment, even though some investors are pointing to cheap valuations, as both currencies and company earnings remain very vulnerable.  

“The Brazilian government has been pursuing policies that sought to prop up GDP growth in the face of a terms of trade shock, which I see as unsustainable, and as such I think most companies will struggle to drive real hard currency profit growth,” he said.

“Russia is in the early stages of what could be a nasty recession. If oil were to go back up to US$100 a barrel, it could help them but I think it is unlikely that it will rise that high anytime soon. As such, I think even the best Russian companies would be unaffected, which is why for the moment I intend to only watch Russia from the side-lines.”

Brazilian companies have a 0.33 per cent weighting in the Newton fund, while Russian stocks account for just 1.38 per cent of assets.

Marshall-Lee accepts that there could be times when Russia and Brazil rallies, but would much rather suffer short-term underperformance rather than put investors’ money at risk. Russia is indeed one of the best performing emerging markets so far this year, returning 29.68 per cent as at 15 June 2015. Russian equities have sold off in recent weeks, however.

Performance of indices in 2015

 

Source: FE Analytics, performance with dividends reinvested between 1 Jan 2015 and 31 Dec 2015

“Markets don’t go up in straight lines but they also don’t go down in straight lines. Not only do the Russian and Brazilian economies have big problems but the currency is also an issue, and both [the real and the rouble] could go down further,” he said.

“As a UK investor, that means the market has to work even harder to make you money.”

Looking elsewhere in emerging markets, Marshall-Lee says there are some parts of the Chinese markets that he likes – particularly companies associated with the growth of the emerging market consumer, which is a theme throughout his portfolio.

He’s more wary of state owned enterprises however, which are subject to political interference.

“A large percentage of the emerging market companies in which foreigners can invest are state-owned enterprises. We do not like the influence governments can exert on the fortunes of these companies so we have almost negligible investment in those that are state-owned,3” he explained.

Chinese companies have a 19.4 per cent weighting in Newton Global Emerging Markets as at the end of March 2015, while stocks domiciled in Hong Kong make up a further 7.92 per cent.  

Newton Global Emerging Markets’ objective is to deliver long-term capital growth to investors. While Marshall-Lee does invest in some companies that pay dividends, income is not his prime focus. This allows him to take him into certain countries and sectors that income-focused managers cannot.

“We have 20 per cent of the fund in internet companies4, which is a key theme that runs through the fund. It’s an area of the market that you aren’t able to get much access to if you’re looking for an income, but if you’re looking for growth there are huge opportunities.”

“As well as internet companies, you’re not going to be able to get much access to India or the Philippines if you’re looking for companies providing a good income from you investment.”


 

Marshall-Lee has run the Newton Global Emerging Markets strategy since May 2011. It was initially launched as an institutional fund but a retail version was introduced in October 2013.

Performance of fund versus sector and index since October 2013

 

Source: FE Analytics, bid-to-bid performance with dividends reinvested between 2 Sept 2013 and 16 June 2015

Since October 2013 the fund has returned 20.56 per cent as at 15 June 2015 in total return terms, which puts it significantly ahead of its IA Global Emerging Markets sector average and MSCI Emerging Markets benchmark over the period.

 

[1] A raw material or primary agricultural product that can be bought and sold.

[2] Source: Newton as at 05.06.15

[3] Source: Newton as at 05.06.15

[4] Source: Newton as at 05.06.15

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