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Global recession? What global recession?
After a dismal 2018, almost all equity funds had a banner year in 2019, despite trade wars and sanctions (against China as well as Russia), Brazilian bribery scandals, and attendant global economic and political uncertainty. Even the emerging markets category (including China, Russia, and Brazil) averaged a very respectable 12.5% return for the 12-month period ended December 31, 2019.
And of course, that’s just the average – some funds did far better. The Invesco Emerging Markets Class, for example, more than doubled that average with its 27.7% return on the year, and Hong Kong-based portfolio manager Jeff Feng attributes this success to a fundamental perspective on value as well as growth prospects.
“Our philosophy is strictly bottom-up,” says Feng. “We invest in high-quality businesses with good growth prospects, at attractive valuations. That doesn’t mean cheap stocks based on price-to-earnings or to book value, because those measures do not fully reflect a company’s growth potential. We try to determine how much money a company will earn three to five years down the road, and measure that against its current value.”
This pursuit of growth potential at good value has led to a portfolio currently weighted heavily in Asia. “We used to be overweight in Brazil, but we’ve found it difficult to find good-quality companies at good valuations, and sold our last position there six months ago,” says Feng. “We have a much larger position in Asia where the valuations are much more attractive compared to other markets, particularly in China because of the trade war with the U.S.
“We’re also overweight in Russia,” Feng adds. “The sanctions levied by the U.S. and Europe drove away investors and improved valuations...and they did a good job with inflation. The ruble depreciated almost 50%, so although commodity prices were weak, they actually appreciated in rubles due to that currency’s depreciation.”
In terms of specific companies, the portfolio is accordingly laden with Chinese names, the top two holdings being Alibaba Group Holding Ltd., and Ping An Insurance Group Co. China Ltd. “Alibaba is the largest e-commerce company in China and, like Amazon, it provides a platform for third parties to sell products and services to consumers,” says Feng. “That’s a very strong business model because it doesn’t require logistics and delivery centers. They are also expanding into other Asian countries, so growth prospects are good, yet they trade at a very attractive valuation compared with their U.S. peers.
“Ping An is the largest insurance group in China, offering life insurance as well as a large P&C [property and casualty] business, and they also own banks and securities companies,” he adds. “They have a very strong management team, good valuations, and good growth prospects – the penetration of life insurance in China is very low compared to other Asian countries, such as South Korea and Taiwan, and per-capita GDP growth in China is creating a big demand for life insurance, so there is huge growth potential.”
As for the future, Feng doesn’t see long-term problems despite the current coronavirus scare. “I think the issue of coronavirus will pass in a few months,” he says. “It may have an impact for the first quarter of 2020, and maybe part of the second quarter, but the markets will come back, and I don’t think the virus will dent the long-term growth potential of China. For weak companies, it may be a nightmare, and although strong companies will also suffer, they’ll be in a better position afterwards because there will be less competition.”
Beyond that, Feng says he is “reasonably optimistic” about the longer-term potential of emerging markets. “Going forward, we don’t see interest rates going up, even in the U.S. And we should see some influence from developed markets, where investors desperate for higher yields will turn to emerging markets because the yields are quite attractive.”
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
Notes and Disclaimers
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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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