Rob Brewis and John Ewart, two of the portfolio managers for the Aubrey Global Emerging Markets Strategy, discuss the opportunities that lie ahead for emerging market consumption in 2024. In this 10-minute video, Rob and John look beyond both the index and the headlines on China.
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(JE) Hello and welcome to this discussion from Aubrey Capital Management on Global Emerging Markets. (RB) My name is Rob Brewis, and this is John Ewart and we are two co-managers of the Aubrey Global Emerging Market Strategy.
(JE) I would like to begin this discussion by highlighting the graphic which demonstrates the returns recorded by the MSCI Emerging Market Index and other indices within the MSCI category, notably the consumer staples and consumer discretionary. But importantly, the Aubrey GEM Strategy Fund returns, itself. The MSCI (EM Consumer Discretionary) Index has returned a modest 20% since March 2012, which is the date of the inception of our Strategy. By contrast, the Aubrey Strategy has delivered over 135% for our clients. Importantly, over 80% of that alpha has been generated by stock selection; finding good companies at attractive valuations which generate positive returns for investors. We continue to think that the opportunity for emerging market investors is attractive, but it has to be at a country, a sector and a company level, rather than looking at all elements of the index.
China and India have been particularly successful areas of investment for us over the period of the Strategy’s tenure and, with 1.4 billion people in each country, we continue to expect that to remain the case. As people get wealthier, they spend their money and there are many products, services and e-commerce opportunities that have developed in China, and certainly will be developing in India over the coming years.
Now investors watching this discussion will be well aware that some countries such as China have been on the receiving end of a fair degree of criticism this year. But tell me, Rob, do you think that this has been overdone.
(RB) Yes, I think China has been in the headlines for all the wrong reasons and it has been a very difficult few years, particularly with COVID lockdowns and so on. But I think we have to be realistic and realise that China’s glory years of growth are well behind it. But we still think there are opportunities, and this chart shows one of those which is a company called Proya Cosmetics, and the black line is the share price chart. And you can see that even in what has been a pretty tough bear market in China, Proya has made you reasonable returns over the last five years or so. Interestingly, the green line is the PE (Price Earnings ratio) of that company and you can see that that has been heavily derated during this period, and I think that reflects a lot of the companies that we still own in China that offer good value.
What we would like to say though is do not write China off just yet. There are areas in China where the world really cannot do without and they are doing extremely well, electric vehicles, batteries, solar panels etc. All things that we could not really do without and are growing very, very quickly. As you can see from this chart, China has overtaken all the other major auto exporters in a period of about two years. A pretty dramatic move. So I think there still remain opportunities. But that said we are more excited about the potential in the next decade or so about India.
(JE) This is an interesting slide because it does highlight the extent of the improvement which the people of India are seeing under the reign of Prime Minister Modi, who was first elected in 2014. The investment and infrastructure projects such as national highways, the rail network and also the port capacity has been greater in the last ten years than it has been since the country gained independence. But it has not only been at the infrastructure level. Many of the country’s citizens are seeing a significant improvement in their daily lives through investment in facilities such as sanitation to their homes, utility services to their homes, and also the affordability of homes which has become a prominent feature of one of Modi’s policies of reform. So, this is improving the well-being of the people of India and we expect this to have an impact on the outlook for wealth creation within the country.
This is an interesting illustration of the opportunity for the Indian consumer. The average (annual) income in India is approximately 2,500 dollars per person and, as that increases, we will expect to see consumer behaviour change and there will be increasing numbers of products and services bought by them. You can see with the graphic regarding beauty and personal care that India is one of the lowest ranking amongst those regional peers and this simply illustrates that it has a long way to go to catch up as consumers earn more money and buy more basic goods and services. Hopefully, our viewers will be familiar with this positive expectation that we have for India. But Rob, do you consider that the valuations continue to be attractive.
(RB) Yes, this first slide shows the China Index over the last ten years or so and you can see the effect of the bear market that we have had in the last couple of years. The green line is the PE which clearly shows that it is very much at the bottom of the range and I think that is pretty well understood.
I think the bigger question investors have is on India which is this chart, and that is a much more complicated question. Clearly the Indian market has done much better over the past decade. But the green line in the middle is the PE of the broad market (NIFTY Index). And as you can see its pretty much in the middle of the range that it has been for that last ten years or so. Now at 20 times earnings maybe that is high, who knows, but you could have said that in 2017, at that point the NIFTY was at 10,000. Today it is at 20,000 and is at the same PE, so you would have missed out on that. Our view is pretty straightforward, that India is in the middle of its valuation range, not cheap, not expensive. And given the opportunities that John has talked about, I think that is still very attractive for us. But that is perhaps enough about the two major markets in emerging markets. But what about other opportunities, John?
(JE) That is an important question, Rob. Mexico has been a beneficiary of investor interest within the emerging market space this year. This is an interesting chart because on the right hand side we can see the increase in Gross Fixed Investment which has been driven by the extent of international companies building capacity in Mexico with the intention of exporting to the US. Also, on the left, perhaps less appreciated has been the development of the growth in Pension Fund Assets within Mexico and clearly as that figure has increased, a lot of domestic managers are investing in the domestic stock market itself. It has been very supportive for better quality businesses, which are the types of companies that we identify.
I would also highlight Indonesia has been a beneficiary this year of the move of production capacity from China in particular, as many companies have looked to have production capacity outside of China and that continues to support the outlook for the domestic infrastructure and economic growth. And lastly, Brazil is worth highlighting given they were one of the first countries to see an increase in interest rates to tackle inflation. Inflation is now declining, and we expect to see rates to fall further next year, and we think that will be a positive for the consumer behaviour.
Given that improving expectation for inflation and a reduction in interest rates, what would be your thoughts for the outlook for 2024, Rob? (RB) Looking towards 2024, we have a couple of really positive drivers for emerging markets. Personally, as we have discussed, inflation peaking, lower interest rates is very positive for both business investment and consumer spending. The nearshoring trend that we have highlighted sees investment growth very strong in a number of markets excluding China, of course, in this case. The risk out there is there are a lot of elections coming up in 2024, with the most important probably in India in May. But, for geopolitical considerations, Taiwan in January is also quite important. We have elections in Indonesia and Mexico as well to monitor.
Valuations we have talked about are very much reasonable in the middle of the range in India and lower than range in most other markets, particularly places like China. In summary, clearly we have demonstrated the Aubrey GEM portfolio has very strong long-term track record and we are encouraged by the short-term track record, which is improved dramatically over the year.
Lower inflation and lower interest rates are positive for consumers as their real incomes improve. Lower interest rates and lower inflation are also positive for the valuations of our grid stocks that we focus on.
The Aubrey GEM selective approach to quality growth consumer companies is very well suited to this environment and we are optimistic about the Outlook for 2024.
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