Global Emerging Markets Sustainability

In an environment such as this, we have continued to focus on bottom-up stock selection, focusing on identifying high-quality stewards managing franchises with growth tailwinds and resilient financials. Reflecting this, we have recently added four new companies into the portfolio.

We believe retailers Dino Polska (Poland) and Jerónimo Martins (Portugal) are likely to remain resilient in the current environment. Grocery stores tend to remain stable through periods of inflation, and both Dino Polska and Jerónimo Martins are very well stewarded by the founder and founding family respectively. Jerónimo for example is a 230 years old business, now represented by the fourth generation of the dos Santos family. Their consistent focus on high-quality, low-cost retail and long-term time horizons with regard to nurturing businesses in new geographies has served them well through the past decades.

Over the course of the past year, we re-initiated a position in Pigeon (Japan), a consumer goods franchise focused on high-quality products for infants and mothers. Stewarded by the founding Nakata family, Pigeon has consistently focused on building consumer trust and creating a brand around their reputation for quality. At reasonable valuations, we believe Pigeon has the ability to continue growing across geographies where they have been laying the foundations for long-term growth.

We also initiated a position in Banco Bradesco (Brazil). We have owned Bradesco on behalf of clients in the past and, over recent months, the Bank had de-rated to valuations around one times price to book with 7-8% dividend yields¹ providing an attractive entry point. Bradesco remains one of the best banks in the country, well positioned to continue growing through increased penetration across Brazil and adapting to a more digital ecosystem.

We also added to a number of existing holdings which had suffered from more acute weakness, including Silergy Corp (Taiwan), Techtronic Industries (Hong Kong) and MercadoLibre (US listed, headquartered in Argentina). We remain convinced of the quality and attractive long-term growth prospects of these businesses, and so took the opportunity to purchase more shares at prices substantially below where they have traded lately.

We funded some of these purchases by reducing cash and trimming some companies which had held up relatively well, like Unicharm (Japan) and Mahindra & Mahindra (India). We also exited one small holding, Hualan Biological Engineering (China), in which we have found it difficult to build conviction in the ability of the company to mitigate growing competition from state-owned peers.

Going forward, it seems as though we are in a period of fairly unprecedented macroeconomic policy uncertainty. Monetary policy has shifted from ultra-loose to a rapid tightening with frantic speed, and may well overshoot, with accordantly dramatic impacts on equity prices in the short term. In such an environment, it seems less than fruitful to try to predict the near-term future direction of inflation or interest rates. Instead, we are focused on building portfolios full of resilient companies with long-term tailwinds which should benefit over the longer term from the opportunities in emerging markets.

1 Source: Bloomberg

We also purchased Tube Investments, an Indian industrial conglomerate. The founding Murugappa family continues to own 48% of the business, and next generation owner-manager, Vellayan Subbiah, has embarked on a journey to both improve execution within the core franchise and broaden the remit of the business. Looking to the histories of global industrial conglomerates such as Halma and Danaher for inspiration, and with a wonderfully long-term time horizon, Tube has set out to create something similar in India. The first step on this journey was the acquisition of CG Power, an electric motors business that is the beneficiary of strong, sustainable tailwinds selling into electric vehicles and renewable energy. India is home to numerous small, family-owned industrial businesses that are looking for homes for their franchises when the next generation might not want to take control. The reputation of the Murugappa family, Vellayan’s history of successful execution, and the strength of the balance sheet, mean that Tube has the opportunity to provide these companies this home and continue to grow their own business. This balance of a century-old family legacy alongside the ambition to create something that endures for at least another century, we believe, provides an opportunity for solid returns over the coming years.

Along with Tube Investments, we also initiated a position in IndiaMART, an online B2B classifieds platform in India, connecting suppliers and buyers across a range of end industries. Founded by the Agarwal cousins in 1996, IndiaMART has grown to control 60% market share in the country, about 10 times larger than their nearest competitor, but are only at the starting stages of continued penetration of the platform, with only a small percentage of small and medium-sized enterprises (SMEs) across the country having a digital presence. The founders have demonstrated a focus on building a resilient business over the long term, balancing growth and profitability, and on maintaining a solid balance sheet. This is a cash-generative business, and the managers have consistently reinvested behind growth to remain beneficiaries of the structural growth tailwinds around them. 

Our strategies do not invest in oil, gas or coal, and we are always likely to underperform on a relative basis for short periods when fossil fuel markets are rallying. As ever, our focus remains on long-term absolute returns, which we believe are best achieved through avoiding investing in fossil-fuel reliant businesses. Through this period, we have continued to build up position sizes across a number of our favourite companies – such as Mahindra & Mahindra (India), WEG (Brazil) and Network International (UK-listed company operating in the Middle East and Africa) – where we have high conviction in quality as well as the long-term opportunity.