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Luxury cars and video games: fund managers reveal their best ideas

The growing middle class in emerging markets heralds great – albeit sometimes hidden – opportunities for investors. Citywire-rated fund managers explain how and where they find the best growth markets.

When the Argentine peso, the Turkish lira and the Indian rupee recently sank to their lowest levels since May 2017, investors started to hear a word that seldom promises anything good: ‘contagion’.

Despite fears spreading following the Argentine and Turkish sell-offs, the sheer size and variety of the emerging market sector hides many other opportunities that investors are keen to discover.

One major thematic opportunity is the growing middle class population in emerging economies. A Pew Research Center study found that the middle class in Asia and the South Pacific region grew from 31% of the global total in 2001 to 51% in 201 and predicted that the middle class in Asia will exceed 3 billion people by 2030.

Here, four Citywire-rated managers reveal where they have found the best opportunities, which sectors have been affected the most and how they have changed their allocations to take advantage of this growing demographic.

This article originally appeared in the October 2018 issue of Citywire Switzerland. 

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When the Argentine peso, the Turkish lira and the Indian rupee recently sank to their lowest levels since May 2017, investors started to hear a word that seldom promises anything good: ‘contagion’.

Despite fears spreading following the Argentine and Turkish sell-offs, the sheer size and variety of the emerging market sector hides many other opportunities that investors are keen to discover.

One major thematic opportunity is the growing middle class population in emerging economies. A Pew Research Center study found that the middle class in Asia and the South Pacific region grew from 31% of the global total in 2001 to 51% in 201 and predicted that the middle class in Asia will exceed 3 billion people by 2030.

Here, four Citywire-rated managers reveal where they have found the best opportunities, which sectors have been affected the most and how they have changed their allocations to take advantage of this growing demographic.

This article originally appeared in the October 2018 issue of Citywire Switzerland. 

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Rajiv Jain

CIO, GQG Partners

Opportunities resulting from the growing middle class were once primarily about consumer goods and basic services, but as these emerging economies have progressed, we believe the opportunity set has deepened significantly.

In China, for example, growing prosperity has created demand for insurance and wealth management products that simply weren’t on offer a decade ago.

Growing prosperity has also greatly increased demand for leisure goods and services – look at the expansion of Macau’s gaming industry over the past two decades!

It used to be that one of the best ways to take advantage of this trend was to invest in global consumer goods giants. That’s not the case nowadays. You can’t simply buy Nestlé, which is struggling not just in developed markets but also in emerging markets.

We look for the highest-quality companies regardless of the sector in which they operate. Consumers are willing and able to pay for a better quality of life. We have exposure to financial services, gaming, luxury goods and internet services. This year we’ve increased exposure to healthcare in places such as China and Thailand.

The growing middle class is a powerful tide lifting many boats.

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Thomas Schaffner 

Portfolio manager, Vontobel

First and foremost, we are active, bottom-up, long-term investors. We are aware of trends, but when investing, we don’t follow trends and wouldn’t deviate from our investment process to follow them.

The key driver of our performance is stock selection. We like companies that are leading in terms of return on invested capital and industry positioning, trading at a discount to their fair value, and effectively addressing environmental, social and governance issues.

Geographically, we overweight Asia, as we see more potential in
companies located in that region — for example, in China. The country has quite a broad market, and the profitability of selected companies is good if you leave out traditional industrials and commodity-related sectors.

Other countries we favour are South Korea, South Africa and Taiwan.

In emerging markets, the recent correction has created attractive
valuations. Based on a Shiller P/E ratio, the discount of emerging markets versus developed markets has grown over the past two months to more than 36%, approaching the multi-year low of 40% reached early 2016 (see chart below).

Such low valuations may be flashing a rebound signal.

At least this is what history tells us – the bounce-back of emerging markets equities at the beginning of 2016 is a case in point.

In addition, one should not forget that long term growth prospects for emerging markets remain very attractive when compared to developed markets.

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Ian Simmons

Lead portfolio manager, Charlemagne Capital 

The demands of emerging market consumers vary depending on their stage of economic development.

Beyond basic consumer goods we believe that service sectors such as life insurance, mortgage providers, travel, healthcare and education all offer structural growth opportunities for investors exposed to a wealthier middle class.

The convenience and affordability offered by e-commerce companies is resulting in rapid growth in online shopping.

We also have exposure to banks in underpenetrated markets such as India, Indonesia and Mexico.

Our allocations depend on bottom-up stock opportunities. In the sell-off this year we have added new names to the portfolio, many of which are exposed to rising wealth in the largest Asian markets, where we see not just sheer size, but also a faster
conversion of low-income workers to the middle class.

Wynn Macau and Wuliangye are examples of top-quality businesses we have followed for some time, and while the market worries about trade wars, we have been able to build positions at
attractive valuations.

Our patient approach and diligent fundamental research ensures we are ready and willing to push back against short-term market
fears to give our investors exposure to quality growing businesses at a reasonable price.

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Geoffrey Wong

Portfolio manager, UBS

Our analysis shows that as incomes increase in large economies such as China, consumption trends towards premium products and services increase at a faster pace.

Our exposure to high-end home appliances, luxury cars, premium cosmetics and liquor companies fits this theme. Similarly, we play that trend in India, particularly rural India, with exposure to Indian cars, banks and a national energy transmission company.

We have increased our exposure to China on a bottom-up basis.

We continue to focus on companies that benefit from long-term themes and the rebalancing of the economic structure toward a service-led economy, as opposed to the top-down noise of trade
concerns and deleveraging.

We believe the rebalancing of the economic structure in China will continue to provide investment opportunities, especially within service sectors such as e-commerce, e-payments, social media, education and insurance.

We also see attractive bottom-up opportunities in India. An indirect way to play the growing middle class is through banks — we find that a great way to address the positive emerging markets economic story is via a cheap source of stocks.

Many of the banks whose stocks our funds own also have idiosyncratic drivers, such as the structural underpenetration
of credit in Mexico, where quality banks should sustain double digit growth of credit over the foreseeable future.

We also like the long-term underpinning behind the healthcare sector. However, company valuations are rather high at the moment.

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Related Fund Managers

Ian Simmons
Ian Simmons
75/261 in Equity - Global Emerging Markets (Performance over 1 year) Average Total Return: -7.77%
Geoffrey Wong
Geoffrey Wong
18/214 in Equity - Global Emerging Markets (Performance over 3 years) Average Total Return: 34.53%
Rajiv Jain
Rajiv Jain
60/214 in Equity - Global Emerging Markets (Performance over 3 years) Average Total Return: 23.92%
Thomas Schaffner
Thomas Schaffner
4/114 in Equity - Asia Pacific Excluding Japan (Performance over 3 years) Average Total Return: 35.04%