Manager update
Portfolio Manager, Andrew Ness, outlines the recent trades, where new opportunities lie and his market outlook for emerging markets.
I’m Andrew Ness, co-manager of TEMIT and I’m delighted to join you from our Edinburgh office on this beautiful Spring day. For those of us in the UK, it is a delight to finally see some sunshine and feel some heat.
Unfortunately, emerging markets (EMs) have felt plenty of heat over the last 12 months. A challenging combination of rising inflation and interest rate hikes, the ongoing Russian invasion of Ukraine and supply chain challenges have weighed on both economic activity and investor sentiment. However, several bright spots have emerged in recent months — signs of receding inflation, policy support for domestic consumption and China’s pivot away from zero-Covid has started to restore investor confidence and markets have stabilised.
…several bright spots have emerged in recent months — signs of receding inflation, policy support for domestic consumption and China’s pivot away from zero-Covid has started to restore investor confidence and markets have stabilised.
By region, EMs in Asia have fared better than their peers in Latin America and Emerging European, Middle Eastern and African (EMEA) markets. However, all three regions witnessed a decline over the last year. Stocks in China initially contributed to regional gains after the dismantling of the country’s zero-Covid policy and measures to spur the economy, such as support for the property sector however the market has subsequently sold-off in recent months on the disappointing re-opening and the ongoing US-China tensions
Weakening global demand for consumer electronics meanwhile weighed on tech-heavy markets in South Korea and Taiwan, and the Indian market corrected following its previous strong performance.
Latin America was dragged down by the emergence of political concerns which weighed on currencies and markets. Emerging European markets meanwhile lost ground on the fallout from Russia’s invasion of Ukraine and the dislocations in regional energy markets.
Towards the end of the year, share prices in the Middle East which had been through a boom, declined as oil prices moderated and liquidity conditions tightened in some of the markets.
So overall, a challenging backdrop for us to navigate. However, the good news is that we’ve managed to do that over the last 12 months to end March we’ve both outperformed the MSCI Index (MSCI Emerging Markets index) and generated a small positive absolute return for our clients. [See TEMIT Annual Report 2023]
And that’s due to our investment approach that has remained true to our beliefs, seeking sustainable earnings at a discount to intrinsic worth. This means TEMIT’s portfolio characteristics have been consistent for some time, thus allowing us to navigate the challenging market environment out there.
Higher returns on capital and lower leverage characteristics of the portfolio should be able to weather inflationary pressures – better margins and lower interest payments.
Also, lower valuation characteristics of the portfolio should make it less exposed to valuation compression from rising rates versus more expensive long-duration growth-oriented names.
In addition, a significant number of our companies are offering attractive dividend yields and many are buying back shares and this provides additional support to the portfolio.
Looking forward, we still have confidence in both the asset class and in our portfolio and that’s because of the attractive characteristics of the companies we own. We remain positioned in long-term themes including consumption premiumisation, digitalisation, healthcare and technology.
We focus on companies reflecting our philosophy of owning good quality businesses, with long-term sustainable earnings power and share prices at a discount to intrinsic worth.
We see high levels of leverage as a risk and continue to avoid companies with weak balance sheets.
10 JANUARY 2023
5 reasons emerging markets are better positioned than developed markets to deliver growth.
Our portfolio continues to reflect a high level of diversity of names by industry, where in our top 20 holdings we have 13 different industries represented – ranging from semiconductors, banks and retailing to chemicals, insurance and media and entertainment.
We also have a good mix of well-known large-cap names. For example, ICICI Bank – one of the largest private sector banks in India, TSMC – the world’s leading semiconductor foundry and also some lesser-known names too - for example LG Corp - a Korean conglomerate with world class assets in consumer electronics, EV batteries and speciality chemicals. And also, names like Guangzhou Tinci – the world leader in electrolyte production – a critical component for electric vehicle batteries.
These companies are all typically leaders in their respective industries, with resilient business models, robust balance sheets and solid profitability that gives them an ability to navigate the challenging environment out there.
These companies are all typically leaders in their respective industries, with resilient business models, robust balance sheets and solid profitability that gives them an ability to navigate the challenging environment out there.
In terms of our portfolio activity, and where we are finding new opportunities, our recent transactions fall into one of four themes.
First, we’ve taken the opportunity to invest in Indian Technology names after a significant decline in share prices due to higher interest rates. We’ve invested in a number of businesses that are typically market leaders, are consolidating their market positions and have a long runway of growth ahead.
Second, we have increased our exposure to the Korean electric vehicle supply chain where we believe there are opportunities to win market share as the world looks to reduce its exposure to China.
…we have increased our exposure to the Korean electric vehicle supply chain where we believe there are opportunities to win market share as the world looks to reduce its exposure to China.
Third, we are selectively investing in the Middle East which is enjoying an Initial Public Offering (IPO) boom as the Governments seek to develop their domestic capital markets.
And finally, we’ve increased our exposure to China as the economy is expected to further recover post reopening.
Our country exposure has been consistent for some time with our key overweights being in Korea and Brazil; a reflection of the bottom-up opportunities in those markets. And we remain underweight in China, South Africa and Saudi Arabia.
And from a sector perspective, we remain overweight semiconductors and software services. We are effectively investing in the enablers of the digital revolution taking place around us. We are also overweight the companies that are disrupting traditional industries. So, we are overweight internet versus e-commerce, food delivery and media and entertainment names. We are also overweight emerging market banks as one way to play the consumer under-penetration story in emerging markets.
And finally, we remain underweight Energy, Utilities, Real Estate and Healthcare.
EM markets in 2023 have been volatile thus far with higher interest rates and concern on the demand environment. The correction in energy prices and post-Covid recovery in China, however, are tailwinds for emerging markets.
The correction in energy prices and post-Covid recovery in China, however, are tailwinds for emerging markets.
In China the Technology sector has adjusted to the new policy and demand environment. We expect returns from here to be driven by steady growth with strong cash flow generation and favourable capital allocation. However, geopolitical concerns continue to impinge on valuations.
The semiconductor cycle has been weak though supply curtailment has started in earnest. We remain positive on the sector although we have reduced overweight position given weak near-term earnings.
Electric Vehicle battery manufacturers meanwhile have gained significantly from policy benefits, and we have increased our exposure to that sector.
Electric Vehicle battery manufacturers meanwhile have gained significantly from policy benefits, and we have increased our exposure to that sector.
Finally, it is an interesting time to be looking at the emerging world today.
We believe that the breadth of opportunity, the growth, the innovation, the sustainability of the business models, and the much stronger institutional resilience compared to decades past when considered together create an attractive future for EMs.
Shares in TEMIT qualify as an investment which can be held through an ISA. TEMIT is available through a stocks and shares ISA from a number of different companies. Your financial adviser will be able to give you full details of the options available to you.
What Are the Risks?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.
Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund’s holding at any one time.
For illustrative/discussion purposes only. It is not a recommendation to purchase, sell or hold any particular security. It is neither indicative of any portfolio holdings at any one time nor reflective of current or future portfolio holdings. Past performance is not necessarily indicative nor a guarantee of future performance.
Individual securities mentioned are intended as examples only and are not to be taken as advice nor are they intended as a recommendation to buy or sell any investment or interest.
