28th May 2015
As regional allocation comes to the fore in the emerging markets, Gary Greenberg, head of Hermes emerging markets (EM) reveals some of his top developing market picks…
The paths of the major EM markets have grown increasingly divergent. Russia has bounced from a very low base, but remains speculative, as Putin continues his bellicose approach to foreign policy. Brazil’s voters have already lost confidence in the newly re-elected government, while both China and India have seen rapid stock market growth in the last year.
In this environment, getting country asset allocation right has been critical to success. Taking underweights in Brazil, Mexico and Malaysia has been positive – while our two large overweight positions in China and India have driven outperformance.
At a stock level, a resurgent India under Modi is undergoing a manufacturing transformation, creating an environment for some stellar performers. Meanwhile in China, the A-share market has seen a strong recent spike on flows from domestic investors. In this market, we have invested in growth companies in manufacturing, digital technology and liquor.
Below are examples of some key largely unknown names driving performance for our Hermes Global Emerging Markets fund.
Moutai is the Chateau Lafite Rothschild of China. The drink originates back to the Qing Dynasty (1644–1912) and became the first Chinese liquor to be produced in large-scale production, with an annual output of 170 tonnes. The company dominates in the sale of luxury in China. The stock price took a dive when President Xi Jinping issued ‘Eight Regulations’, which warned officials against hosting lavish parties replete with luxury liquor. However, we are now seeing signs of recovery.
Gree is the number one air conditioning brand in China and one of the largest OEM manufacturers, exporting all over the world. It is a company with a very high return on equity – in the 30s – and P/E in the high single digits. This is a company that has demonstrated good management, and we believe it has good growth potential.
This is a digital technology company making surveillance cameras – mostly for corporates, but also for homes. It has the number one market share in China, but it is also expanding internationally by about 100% annually and its local business is growing by about 30% a year. The technology is cutting edge and it has impressive management.
This is the type of ‘best-in-class’ manufacturer President Modi’s Make-in-India campaign is aspiring to create. This Indian industry leader has evolved from a low-cost domestic auto component maker in the 1960s, to a global provider of advanced end-to-end engineering solutions. Based in Pune, it has manufacturing centres in India, Germany, France and Sweden – while it sells products to North America, Europe, China, Brazil, Russia and Australia. This scale has enabled it to surpass smaller, regionally-focused competitors and achieve a dominant position in the global forging industry.
This is a leading Indian automotive mirror and wiring harness manufacturer for passenger cars. It is operating in an industry that has undergone strong consolidation. Manufacturers are no longer in the mode of trying to squeeze the supplier for every last penny, but rather looking for longer term high-visibility partnerships. Motherson Sumi has been acquiring failing auto parts companies and has achieved numerous restructuring successes. It is also moving swiftly with technology, evidenced by the incorporation of radar into rear view windows.