When it comes to the “big” emerging markets, and by that we mean big by both population and potential, it has been a rather binary year in 2021 so far. China down 20% and India up 20% to the end of November. It would be easy to say that 2022 will be another reversal of fortunes, a little like 2021 was a reversal of 2020. We have some sympathy with that view.
China had such a “good” early covid experience in 2020, both controlling the pandemic internally and enjoying an export boom in all the things we needed while stuck at home… It was always going to be a hard act to follow. And so it proved. The regulatory clampdown on the sectors that had become the poster children of both Chinese innovation and its stock market clearly undermined some business models and adversely affected sentiment towards others. A tight noose on economic policy continued, as the CCP tried hard to curtail unwanted leverage in local governments and property developers. And finally, valuations were elevated, especially in those more technology orientated sectors.
Looking into 2022 it is easy to make the case that all these headwinds will at least subside, if not reverse. Comparisons will be easier for a start. The regulatory issues might not be going away, but it is hard to see them having anything like the impact of the past year. Any proclamations or fines these days are generally met with a shrug. The indications are that Beijing will be easing policy at the margin in 2022, and valuations have corrected a great deal and look highly attractive in most cases.
India, in contrast, stuttered with the first covid wave in 2020 but soon realised the futility of lockdowns in a country at India’s stage of development. The second wave was brutal from an immediate human point of view, but letting it run has perhaps saved many more lives as natural immunity has now kicked in. Since then, the economy has roared back, as if making up for lost time. More likely, it is getting back to a higher growth setting which has been made possible by the significant, and perhaps underappreciated, strides the country has made in recent years.
There are a multitude of reasons why we believe this really is India’s time, and these have been discussed before, and will not be regurgitated here (much). These are mostly structural (better infrastructure, reduced corruption, lower inflation, urbanisation, financial inclusion and technology, booming manufacturing…), but are also cyclical (residential property upturn, low corporate leverage, potential investment cycle). We could go on. But there is no doubt this has not gone unnoticed by the stock market, as reflected in this year’s performance, and valuations are stretched, even by Indian standards.
We have reduced some exposure, but are reluctant to leave the dancefloor given the aforementioned potential. Growth is most likely to exceed expectations. It is also encouraging to see the field is broadening for us, with the listing of several new businesses in potentially attractive consumer focussed areas: Zomato (food delivery), Nykaa (e-commerce), Policy Bazaar (insurance comparison), PayTM (payments) to name a few.
Elsewhere in the Emerging Markets world it has been a very mixed bag, with country index returns ranging from over 30% gains (Czech Republic) to over 30% losses (Turkey). Of the big, more developed markets, Taiwan, despite the political backdrop, has won handsomely over Korea in 2021. Both of these are overly influenced by semiconductor behemoths, an area in which we do not claim expertise. That said, it is firmly our view that the talk of semiconductor shortages, or indeed any other shortages, will be a distant memory by this time next year.
In the rest of Asia our exposure remains largely through Sea Limited whose business has had another good year, albeit the stock price has corrected of late. We remain positive on the business and the shares now look attractive once more. As in India, the field here is widening with the listing of Bukalapak (e-commerce) and GRAB (ride hailing/delivery) and the imminent arrival of GoTo (the merger of Indonesian champions Gojek and Tokopedia). The more traditional areas of consumption remain hampered by lingering covid issues, indifferent politics, and competition from the online world.
Troubled politics and the associated hurt this causes economies and confidence can be extended beyond South East Asia, with potentially troublesome elections coming in Brazil next year, the primary reason for our recent exit. We retain selective and very stock specific exposure outwith the big markets of India and China, and while always on the hunt, do not see this changing markedly in 2022.
Our current stocks have a range of valuations but overall the portfolio is sitting a little above the typical 1x PEG ratio. It is worth remembering though that this is clearly distorted by the larger Indian weighting where valuations tend always to be higher. The China holdings typically have lower PEGs, and particularly so now, and any move back into China would swing the portfolio PEG lower. What is more important to us is not so much what PE we pay, but in ensuring the growth is really coming through to justify it. We do this by looking in the right areas, whether its electric vehicles in China, organised retailers in India, or e-commerce in Indonesia, and then investing in the right companies. 2022 will certainly be no different, find the right companies, and it should be a rewarding year.
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This document has been issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction. This document has been prepared solely for the intended recipient for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice. Any comments expressed in this presentation should not be taken as a recommendation or advice. Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated. Aubrey Capital Management Limited accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. This document does not in any way constitute investment advice or an offer or invitation to deal in securities. Recipients should always seek the advice of a qualified investment professional before making any investment decisions.
