New frontiers
While stressing that a strict bottom-up approach limits thinking on a specific country or sector basis, one area Donald picks out as offering cheap valuations at present is Turkish banks, particularly Akbank and Isbank.
He says: “While people are concerned about an attempted coup in Turkey, which is slowing down growth to a certain degree, these are well-capitalised institutions and look like pretty good value at this stage.”
Donald is also happy to take positions in frontier markets, though these make up less than 5% of the fund. He has a position in Argentine oil and gas major YPF, and three positions in Pakistan including the largest bank HBL.
Donald has a mixed view of the so-called Brics. In common with other emerging market investors, Lazard had a tough time in Brazil last year at the height of the Petrobras scandal, though has also benefited from the market’s subsequent rally.
The team holds a position in Banco do Brasil, which at one point slipped down to half of book value. Investors have been nervous about the government’s ownership of the bank, though it is managed more like a private-sector bank, and Donald believes non-performing loans are in the process of moving towards a peak in the Brazilian banking system.
“Brazil is up 70% this year, very much against the consensus at the beginning of the year, but it is not impossible that it can go further,” he says. “The critical step is that the government can enact measures to reduce the budget deficit. If they can do that, it will give business owners confidence in the economy and they will start investing.”
While the fund has not tended to have much exposure to Russia over long periods, given companies’ poor scores for corporate governance, Donald says he is seeing some opportunities for upside growth there.
He has a position in Sberbank, which has managed a return on equity above 15% so far this year, despite the stagnant economic picture. He also likes Lukoil, which has strong profitability, despite the fact it is conservatively managed with no debt.
India is a market Donald is not getting too excited about given its expense, at about 20x earnings, while Chinese companies make up some of the biggest holdings in the fund, including China Construction Bank, Netease, China Mobile and Baidu.
