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Global Emerging Markets: Thoughts
Timothy Hay, Jack Nelson and Sujaya Desai provide their thoughts on Global Emerging Markets.
Investing in Global Emerging Markets (GEM) is never simple. Looking back through 2024, not many people would have foreseen an attempted coup in South Korea, to name just one event that sparked some head scratching amongst even the most weather beaten and experienced of GEM investors. But a conversation with a Mexican auto insurer in the weeks after President Trump was elected reminded us that a focus on the strength of companies is the best way to block out the noise.
The CFO said to us, “we have been doing auto insurance in Mexico for over 30 years and we can’t remember a time when there wasn’t volatility in Mexico. And in that time, we have grown to be the largest auto insurer in Mexico. How? By purely focusing on auto insurance and not worrying about the top down”. We couldn’t agree more. The recent noise around tariffs has seen market volatility not seen since the Covid panic of March 2020 and before that the Global Financial Crisis (GFC) of 2008. Our investment philosophy and process has been honed and weathered through multiple crises. Several of our team started their careers just before the Asian Financial Crisis of 1997. The news on social media, television and even printed newspapers will continue to focus on the market volatility, which is primarily emanating from the White House. We will continue to focus on picking the ~40 companies that we believe offer the best investment opportunities in GEM with the aim to generate the strongest absolute returns over the long term.
The first quarter of this year has been tough and more recent performance has not been to our liking. We have made some mistakes in India where perhaps we haven’t been as ruthless as we might have been in trimming some expensive names. We did sell down some names but perhaps we could have done more. Our IT services exposure has been a detractor through 20251 as companies with exposures to the US have sold off over fears surrounding the US capital expenditure cycle. Relative performance across the fund has suffered as we haven’t been holding any of the very large technology names in China that make up such a large part of the benchmark. Relative performance across the fund has suffered as we haven’t been holding any of the very large technology names in China that make up such a large part of the benchmark during their rally in 1Q 2025. In the 6 months from 18th September, MSCI China increased 46%. From 27th September 2024 to 28th February 2025, MSCI India declined 18%. During both these times we were underweight China and overweight in India but we remain positive on the long-term outlook for India as shown by the fact the investment team has made 3 visits to India in the last 4 months. At the time of writing (8th April) India has sold off 6% during this tariff induced sell off. China has sold off 20% since 18th March 2025. The noise in the markets continues and given at time of writing Trump has announced he will lift tariffs on Chinese imports to 145%, it is likely to get nosier in the weeks and months ahead.
India has performed very well over the last few years and this was evident in multiples being stretched. The recent sell off was therefore a good time to add some names that we have always liked but which we had found prohibitively expensive. And despite the recent rise, MSCI China Index still trades below its 10yr average P/E and 40% below its peak multiple reached in February 20212 so we are seeing plenty of more ideas coming down the pipeline here and across the GEM universe.
We have bought 7 new positions so far this year whilst we have sold 8, which is very much unlike us. Whilst turnover of name seems elevated at 11%, turnover as a percentage of Assets Under Management (AUM) remains fine at 9%3. Nonetheless, the activity in the portfolio deserves a mention. It is important to highlight that the stocks that were sold were smaller positions and that aside from Unicharm, none were over 2% weighting in the strategy. Essentially, we have been tidying up the tail of the portfolio where we held stocks with perhaps lower conviction. Many of these were indeed in China. Some had performed alright and some had suffered some stock specific issues which we couldn’t see improving anytime soon. And the flip side of selling is that we were being presented with some better ideas both in China and elsewhere in GEM.
Alibaba – Everyone deserves a second chance
We owned Alibaba through 2021 having initiated a position in April 2020 and we sold out in March 2022, having booked a loss. The stock performed well through the first 6 months of our holding it but given the subsequent decline, the overall experience was a difficult one. Whilst we can point to the entire Chinese market having had a very tough time in 2022 with slow economic activity and weak consumer sentiment caused by the continuation of Covid restrictions, there is no getting away from the fact that investing in Alibaba back in 2020 was a mistake. The Ant Financial IPO was pulled in November 2020 and through 2021 markets took the view that perhaps Jack Ma and the Government weren’t the best of friends anymore. The final issue for the stock was the ascent of competitors, most notably PDD, which focused on lower cost goods, and the stock has been in the doldrums ever since.
We have now initiated a new 1% position in Alibaba at a price 30% lower than our initial position back in March 20224, but the valuations are substantially different. Back then Alibaba traded on a P/E of 25x whereas now it trades on 15x. Price to Sales is now 2x versus 7x back then, and Price to Cashflow is now 13x versus 20x5. Valuations are now more attractive than they were when we made our first purchase of the stock. But stocks will stay cheap unless there is a reason for them to rerate and it is here that we see the quality of the franchise at Alibaba and how resilient it has been in the face of increased competition. We believe that mature cashflows are now being directed toward capital expenditure in the Cloud business and the roll out of AI into China. The quality of the financials is very strong with US$70bn6 of cash sitting on the balance sheet and a share buyback programme that will help minority investors. We also like the sustainability positioning where we can see Alibaba helping Small and Medium Enterprises which is very important for widespread and more equitable economic development. The quality of the people is historically where the push back has been for Alibaba. Jack Ma’s relationship with the government has not been plain sailing. It appears though that he’s back from the cold, shaking hands with Xi at a recent meeting between the Chinese Communist Party (CCP) and private sector investors. He’s not back running the company. Rather, he has put in place a new team that we hope will drive the company forward perhaps in a similar fashion to the way Bill Gates has let Microsoft flourish under new leadership.
Our approach to China
It appears that the Xi and his government are doing all they can to rebuild bridges with the private sector in China which can only be a good thing. In close partnership with the state, the private sector helped build China over the last three decades and so a renewal of this relationship is crucial to the health and well-being of the Chinese economy. This is not a uniquely Chinese phenomenon. Many countries use the private sector to help fulfil their national goals (think SpaceX and the US Government). What is unique to China is that it is still essentially a command economy so it matters more there how the state and the private sector work together. If China is to recover, it needs both working together for the greater good of China. As allocators of capital into China, any sector’s relationship with government is therefore an important component of the investment case.
We remain fundamental stock pickers. In China there are some 4,0007 stocks that fit our market cap and liquidity requirement from which we can pick, what we believe, to be the few best ones for our portfolios. Put another way, we haven’t written off every company and stock in China. We have seen several companies navigate a steady course through the stormy waters of the last few years. They have undoubtedly come out the other side stronger and more resilient. For many this was the first major downturn in their history and it has proved to be a useful one. What doesn’t kill you makes you stronger. As we have seen with Alibaba and others, valuations are now significantly more attractive and with the changing shape of global trade, domestically focused Chinese companies could become even more interesting.
New ideas in China have therefore been forthcoming. One is S.F. Holdings, the leading logistics company in China which we believe will benefit from the growth of express delivery in China. It is still majority owned by Wang Wei who founded the business back in 1993 when he was 22. He is still General Manager8. He has spent the last 32 years building out an unparalleled network in China which now gives it a cost advantage across the region. In a scale focused, but margin thin, industry like logistics, the operational management is crucial. We feel we can back Wang Wei as a long-term steward. Shenzhen Mindray is a leading medical company in China which we have also added to the portfolio. It provides life support and patient monitoring equipment and is a national brand which will help as hospitals look to replace other international providers of similar equipment such as GE Health Care and Siemens Healthineers so for the time being it enjoys healthy margins. We will keep an eye on the margin profile though.
To fund these new ideas we have sold out of Hangzhou Robam and Glodon. These two are very much tied to the fortunes of the housing market in China and whilst we can see the efforts made to get consumer spending to improve, there remains oversupply across China. In that case, why own a company who sells its software to construction companies (Glodon). Hangzhou Robam also has most of its sales going into new build properties.
India – using the sell off to add new quality long term ideas.
Elsewhere we have sold out of Godrej Consumer and Bajaj Housing Finance in India. We participated in the IPO of Bajaj Housing Finance, which was a salutary reminder of how these offerings work in that it was very successful and we hardly got any of our requested allocation. Liquidity in the aftermarket has also been tight so we have sold but we remain happy holders of Bajaj Holding, the asset lite holding company. We have also taken a new position in Bajaj Auto, which has fallen 45% from September 2024 to February 20259. We believe it now trades on attractive multiples for a company that continues to offer decent growth in the near and long term. It is the leading three-wheeler company in India and has been at the forefront of the electrification of the sector which is leading to strong domestic demand as well as growth in exports to African and Latin America10. We sold out of Godrej Consumer on valuation reasons, as India seems to be going through a cyclical slowdown. Many consumer names, which appeared expensive with mid-teens growth, now look over valued when that growth has dropped to mid-high single digits. This was the case here. It was also a source of cash to fund better ideas in India. The final name we have sold in India is Dr Lal’s Pathlabs which is the leading pathology laboratory company in India. We still like the quality of the business but again valuations became extreme with the stock trading over 50x P/E with the expectation that growth would drift lower11.
The cyclical slowdown has presented us with the opportunity to buy many new ideas where valuations have become more attractive. Aside from Bajaj Auto, we have also bought Chola Holdings and Triveni Turbine, also Indian companies. Chola Holdings is the financials business of the Murugappa family group. This is the same family behind Tube Investments, another portfolio holding. It has a solid and steady insurance business, as well as a financing arm. and we back the stewards to allocate capital effectively over the years ahead. Triveni Turbine is the second largest turbine manufacturer in the world after Siemens. It sells into smaller scale industrial power generation units rather than national electricity companies. It has recently ended a relationship with GE which has allowed it to enter new markets. The stock has fallen ~40% since November 2024 to end of March 202512 and we think now is an excellent entry point.
Elsewhere in GEM
We have built a position in BDO Unibank in the Philippines and Walmex in Mexico. BDO Unibank is the largest bank in the Philippines with the Sy family behind it, who we think are great stewards for the long term. The country remains underbanked and management will open branches in some of the less developed islands as well as rolling out the digital channels, which will drive growth. The other new name is Walmex which through December 2024 and January 2025 traded on its lowest P/E since it was listed in 199613. This for a company that has doubled revenues in the 9 years to 4Q 2023 and who has announced its intention to double revenues again in the coming 9 years14. It has been an excellent operator in Mexico and has now branched out into new channels such as healthcare insurance and broadband. It suffered through the weak sentiment of 2024 with the election of Claudia Sheinbaum in April 2024 and then the re-election of Trump but we back them to double revenues in the coming 8 years. The other sales we have made from GEM through 2025 are Dino Polska, which is a very good retailer in Poland, and Koh Young Technology in Korea. Dino is focused on a single format and the stock has performed very well. We believe it is now expensive on a P/E and Price to Cashflow basis. We have used the capital to fund ideas that are more attractively valued elsewhere. We lost confidence in Koy Young after several missed earnings numbers.
This first quarter has seen more activity than people may be used to with us but we are alright with that and as mentioned, on a percentage of AUM basis, turnover is still hardly high at ~12%. We are seeing plenty of opportunities in India and we are firm believers in the long-term stability of the country and the outlook for many companies there to keep growing. In China, with the state taking a more hands on approach to how companies are allowed to generate profits, this does feed into each and every bottom up stock analysis and recommendation. Broadly speaking though we are cautiously optimistic that the flow of capital into the US might be about to turn and that some will find its way back to GEM. It seems that there’s a move by the US administration to weaken the US dollar and so US dollar domiciled capital could as well start to look outside the US for its returns. Of course a full blown trade war could derail this move, but international capital, for many reasons, might not be so happy to have such a large proportion invested in the US right now. Most investors have capitulated and given up on GEM over the last few years and allocations are at their lowest but we are yet to see new capital being allocated to our markets despite valuations in many of our companies are at historical lows. When capital returns to EM, it could lead to sustained and prolonged rerating in GEM equities which we would finally welcome after a long hard winter.
Authored by:
Timothy Hay, Portfolio Specialist
Jack Nelson, Portfolio Manager
Sujaya Desai, Portfolio Manager
April 2025
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