Rasmus Nemmoe, Portfolio Manager, FSSA Global Emerging Markets Focus strategy
In your experience, are some GEM markets more fruitful for stock-picking than others? Conversely, are there any markets that you avoid completely?
India is perhaps where we have found the most investment opportunities. The quality of companies is high and there are many alternatives within a sector to choose from. For example, among the Indian private-sector banks, we own ICICI Bank, HDFC Bank and Kotak Mahindra Bank – they generate high returns on equity and have grown their loan books and deposit franchises despite the challenges in the broader economy. With more than half of India’s population still unbanked, we believe the long-term opportunity for these banks is significant. They are widely owned in the team’s Asia ex-Japan and India strategies too.
We have also found many good companies in China. The market is large and deep with more than 5,000 companies to choose from. While investing in China is not without risk, we try to mitigate those concerns by investing only in companies with appropriate governance structures and strong management teams. Our most recent investment, Chinese local spirits (“baijiu”) producer Sichuan Swellfun, is a good example of this. It is 63%-owned by Diageo, the UK-headquartered leader in the global spirits industry, which ensures that governance standards are high and befitting of Diageo’s strong reputation. We also like South Africa and Brazil despite the challenging macroeconomic and political situation. Like in other tough operating environments, there are still businesses there that have enviable track records of compounding capital. In South Africa, a good example is Capitec Bank, a leading private sector bank which has been able to buck the country’s challenging economic trends. It has done so through a combination of strong execution by its management team, a customer-first mind-set with consistent innovation and scale benefits, and a favourable market structure with large incumbents who have been slow to react for fear of disrupting their own profit pools.
In Brazil, after more than a decade of economic turmoil and political instability, valuations in recent years meant that investors were not being compensated for the relatively higher risks the country faces – and we have been disciplined in this regard, having negligible exposure until fairly recently. Latterly with the market sell-off, some companies looked reasonably attractive and we purchased a small position in TOTVS, a leading Brazilian software company that we have been following for quite some time. It is the dominant enterprise resource planning (ERP) software provider in Brazil with nearly 50% market share. In contrast, we have avoided Russia as well as any country where the political climate makes investing difficult, or where the macro is overly negative (for example, Turkey). Even before the Russia-Ukraine conflict we had not owned any Russian companies for several years. There were few quality companies we would consider investing in, especially with the ever-intervening state, opaque company structures, stretched balance sheets and a lack of transparency on managerial decisions.
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