Aubrey Podcast | Seizing Opportunities in Emerging Markets

Transcript

Mark Martyrossian: Good morning, I’m Mark Martyrossian of Aubrey Capital. Given that each of you is now back into your stride for the coming year, I thought it would be timely to provide a brief presentation about how we at Aubrey see the prospects for emerging markets. I’m joined today with my partner, John Ewart. Many of you know John quite well, but for those who haven’t encountered his sunny presbyterianism before, he is one of the fund managers on our Emerging Market Strategy and has has his hand on the tiller with Andrew and Rob since its inception back in 2012.

I’m delighted to report that the Aubrey EM strategy returned 11.5% last year, which represents a decent chunk of alpha to add to our long-term performance. Perhaps, John, you could start by giving a brief overview of where this performance originated.

John Ewart: Yes, indeed. Thank you, Mark, and good morning, everyone. The performance was primarily driven by stock selection, as you would expect. For those familiar with the portfolio over the years and our existing investors, over 80% of our alpha is generated from stock selection. India continues to be a positive for us. Even in areas of the broader GEM universe, such as Latin America, where there was a degree of disappointment, our stock selection proved to be positive. So, the stock selection has been very encouraging, though asset allocation was a slight negative over the course of the calendar year.

Being less exposed to China when it had the rally at the end of September, on the back of the government stimulus announcements, was one of the primary reasons for that. But, as you would expect, and encouragingly, stock selection continues to be the key.

Mark Martyrossian: Perhaps, John, you could share a word on how the portfolio is currently set up, and that can lead us into the prospects you’re particularly keen on in the coming months.

John Ewart: Yes, indeed. When you look at the structure of the portfolio over the last 12 years, we have consistently shown enthusiasm for large population areas where the consumer is in a position to earn more money and therefore enjoy spending that money. And we’ve seen that transition prove to be successful as investors across countries, actually over decades as investors but specifically within the Aubrey GEM Strategy over the last 12 years.

India and China tend to be countries where we spend a lot of time, clearly large populations but there are also more companies listed in those respected markets which provide opportunity for investors. And India continues to be a favoured market for us, and really, since 2014 when Modi was elected, the prospect of reform of the economy and the continuing development of skills within broader industries, the attraction of investment to the country itself, and also the fact that the broader population was actually more optimistic about the outlook for the economy, results in them spending more of their money has contributed to better economic growth, better profit growth of industries, and also the development of new industries, particularly areas such as e-commerce with the adoption of smartphones. so India continues to be positive.

China by contrast, suffers from the international headlines in the eyes of international investors, but clearly life goes on for Chinese businesses, for the Chinese consumer, and we continue to find ideas in China and whilst we have a greater weighting in the Indian market and the benchmark, we have a slightly lower weighting in the Chinese market, but we do find specific opportunities and that is almost the focus of our efforts as investors on the companies themselves rather than on the broader market and we’re certainly not aiming to cover 2000 companies of the GEM universe. Our ambition is to find the 35-45 companies that we think are the best allocation for our clients capital. And across the rest of the GEM region, we tend to be very company specific, but we’re cognisant of the influence that an improving political or deteriorating political environment can have on the outlook for business confidence and consumer confidence. For example, we have limited exposure to Latin America and the politics certainly have not helped in that regard opver the last 12 months. Whereas we’re increasingly finding more opportunities in South East Asia and we’ve found a number of companies which we’ve known for many years but are now entering that stage of development and profitability where we look to be attractive investment opportunities.

Mark Martyrossian: John, you and I spent a week in the US just before Christmas. It might be interesting just to describe the salient or most common questions we got. And these aren’t just particular to the US, we’ve been picking this up from allocators on a global basis.

The first is: “We love India, but surely it’s all in the price?

John Ewart: If you look at the Indian index, it is trading at approximately around 24-25 times one-year forward, and if you look at the history of the market, the average over the last ten years has been around 21,22 times. So if you had taken the view that the market looked expensive at these levels when it was last at this position in early 2018, and sold the market, you would’ve missed out on the opportunity of 100% return of your money. So you have to look at the specific opportunities for the companies themselves. Clearly not every stock has double since 2018 and there are many stocks that have pefformed even better than that, and that is why investors pay active managers to find those ideas. They are available, its our role to identify and invest int hem accordingly. and i think the other consideration for India is that again with the Modi coalition, re-election in May of last year, we have the prospect of another five years of reform, and hopefully, encouraging support for the broader economy. But there’s a lot more business confidence in India today, and that’ s been primarily driven by the opportunity within the domestic economy and amongst the domestic population. But there are many world class companies within the GEM universe, but quite a number of those are operating on a global scale, for example, Taiwanese tech companies. So for us our focus does tend to have a bias towards the outlook for that domestic opportunity, and India certainly looks the most promising at this stage.

Mark Martyrossian: If investors love India but think it’s all in the price, their view on China is very different indeed. There, I think it is “we hate China, why should we bother invest in there at all?” – how would you respond to that?

John Ewart: We have to accept that China has changed during the period of the COVID crisis, and after, and the prospects were far more encouraging pre-COVID, but the Chinese government did not handle the Crisis particularly well, there was no support for business or for the wider population for example. And the extent for the amount of days, months, spent in peoples houses obviously had an impact on their psyche. But we are beyond that now, and clearly the government is trying to make an effort with the stimulus programme and people are getting back to a degree of normality. And we have to look forward rather than weigh on the past. The Chinese consumer is certainly returning to the behaviours that we’ve seen pre-COVID in specific industries. Travel is a notable area of growth in terms of passenger volumes, but also in terms of expenditure. It’s also the case that the government has attempted to create stimulus from incentives and subsidies in areas such as new car sales, but also interestingly in areas such as domestic appliances. The average life of a refrigerator is about ten years and the government is keen to encourage the consumer to bring their old model and replace the new model. And that’s been very successful and we’ve identified companies that have benefited from that trend. And that programme is now being extended into other categories. So, there are areas of growth, there are reasons for optimism, but it does tend to be very industry and company specific.

Mark Martyrossian: I think the last observation I would make, that with US exceptionalism hitting it’s stride yet again, a lot of US investors and investors outwit the US are saying, “why should we actually bother too much about EM”, some of them saying at all. What’s your response to that?

John Ewart: Well for those investors that wish to be exclusively in the US market, clearly that’s another discussion we’ll be having with them, because we are advocates of diversification for global portfolios, and even within the other regions of the world, the US, Japan, GEM, that there are differences in terms of expectations or opinions. We’re well aware as investors in GEM that China tends to dominate the media headlines. The reality is that as investors within the Chinese market, we’re looking very much at specific stocks and specific industries. So, again, it’s the importance of that focus on the companies themselves and that in turn has been shown to generate the vast majority of the alpha that we have delivered for our clients. We continue to think that there are different dynamics and different regions of the emerging market universe. We think India is positive as we’ve highlighted, and our approach to the other regions is very much driven by the individual companies. But politics can be an important catalyst in actually providing a degree of enthusiasm for change, as we saw in India in 2014, and certainly over the last twelve months, there was a hindrance in Latin America with the new President of Mexico not being as independent in perhaps we would’ve liked to have seen and very much following the policies of their predecessor, and also now in Brazil, unfortunately their seems to be an intellectual battle between the government and the central bank, which is not creating an environment which has not been positive for the economy at large.

Mark Martyrossian: Our last investor in the US recommended a book called ‘How the Scots Invented the Modern World’. It’s a damn good read. Whilst John and his colleagues are too modest to say that they are actually inventing anything at the moment, we do believe that the prospects for emerging markets this year are very well underpinned. If any of you would like further insight on anything John has said or our proposition in EM, please do get in touch. Bye.

Listen to the podcast on Spotify.

Disclaimer

This video 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 video has been prepared for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the video 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 video 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 video or any part of its contents.

This video 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.

GIPS: The Aubrey Global Emerging Markets Institutional Strategy is composed of a number of publicly available funds committed to the strategy (a Luxembourg SICAV, a UK OEIC and a US Commingled fund) together with a number of separate accounts managed likewise (“the EM Accounts”). All the EM accounts included have been taken into account in the calculation of the composite numbers on which the EM GIPS Reports is based (“the Composite”). All performance is reported in US Dollar ($).

Aubrey Institutional claims compliance with the Global Investment Performance Standards (“GIPS®”) and has prepared and presented this report in compliance with the GIPS standards. GIPS is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. To obtain a GIPS Composite Report, please call +44(0)131 226 2083 or email us at clientservices@aubreycm.co.uk.

Aubrey Institutional Fund Division (“Aubrey Institutional”) is a division of Aubrey Capital Management Limited, which is an investment manager authorised and regulated by the Financial Conduct Authority (Reg. No. 455895) and is registered as an investment adviser with the U.S. Securities and Exchange Commission. The Aubrey Institutional Fund Division Investment Strategies are managed by the institutional investment team within Aubrey Capital Management Limited. Excluded from this definition of Aubrey is Aubrey’s Wealth Management division which provides bespoke managed account portfolio services for individual private clients.


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