Looking for value in emerging markets

-- | 05/05/2021

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Lex Hall: Emerging markets are tipped to power ahead in 2021, but there are a few clouds on the horizon. To discuss the outlook, I'm joined today by Patricia Ribeiro, who is Senior Portfolio Manager for the Emerging Markets Fund at American Century Investments.

Hi, Patricia. Welcome to Morningstar.

Patricia Ribeiro: Hi, Lex. Thank you. Thank you for having me.

Hall: I thought we'd start off with India because it's been in the news for all the wrong reasons. The interesting thing this week—and sort of I suppose it illustrates the sort of heartlessness and coldness of markets—is that the market in India is at a high despite the COVID crisis. How worried should investors in emerging markets be about this crisis in India, do you think?

Ribeiro: Yeah, it's actually interesting that the markets are actually ignoring what we are seeing there. So, we are cautious, but we are not being very proactive in changing positions in the portfolio at this time. We are looking, we are following very closely, seeing what's happening there on the ground. But I think what we hear is that they believe that it's going to be just another wave. And we are seeing some lockdowns in India, but not across the whole country, just really specific to some areas. And that is what this is. It's actually postponing some of that, sort of, rollover in terms of the numbers.

So, we are being very careful there, paying attention to what we see happening in other countries in emerging markets. Just the magnitude of the numbers in India are obviously, not surprising, pretty staggering. And that was also combined with some religious events that they also had there on the ground. So, all of that combined has really created a pretty difficult situation. So, what we are expecting to see is rollovers on that. We just don't know how long it will take for that to roll over. As far as names in the portfolio and the markets, we're just being very careful to see what it is that—how that is going to evolve for the next few weeks.

Hall: So, you have a couple of Indian names in your portfolio. Among them are Infosys and HDFC, the Indian Bank. I noticed too that you sold out of Nestlé India recently. What was the motive behind that?

Ribeiro: Yeah, we sold out of our Nestlé when we expected the—maybe the economy and the lockdown in India, the first wave to actually really go down and then we at that point were looking for stocks that will probably be more immediate beneficiaries of the economy, sort of that inflection in the economy and then the bouncing back. As you know, Nestlé is much more of a consumer staple and sort of lower beta. So, were probably looking for a bit more of a higher beta names in the portfolio at that point. But they reported recently, and they reported very strong numbers. And so, not surprising, right, that they are doing well in this environment again when COVID is becoming a lot more challenging there with the lockdowns and everything else. So, we are revisiting the name. But the reason to sell was looking for more higher beta names in the portfolio at the time, specifically for the India market.

Hall: Let's look at the fund a little bit. Its benchmark is the MSCI Emerging Market Index. Over 10 years, you've beaten the fund 5.42 per cent versus 3.65 per cent. You devote about 79 per cent to Asia Pacific, 12 per cent to Latin America, 5 per cent to Europe. How do you beat the benchmark when it contains many of the same names as your fund?

Ribeiro: So, it's interesting. So, a lot of the names that you mentioned, they are portfolio names, but they are not our largest active positions. As you know, the MSCI Emerging Markets is very lumpy. So, the top names, the mega caps and the large caps, they tend to have a very, very large position in the index. And if you like those names, you obviously need to own at least if not obviously more than what the index has.

Hall: Yeah. So, we are talking Taiwan Semiconductors, Tencent, Alibaba, Naspers…

Ribeiro: Samsung, yes, right. They're all portfolio names, we actually like those names, but they are not our top active names necessarily. Some of them are, like TSMC, but not all of them. So, it's about looking at the index and trying to really beat the index by owning more than what they have, and that's why they are so lumpy at the top.

Hall: OK.

Ribeiro: They are not our active necessarily, not active bets, yeah.

Hall: What sort of—in your latest update you talk about secular trends in emerging markets. What do you see and what do you like there, Patricia?

Ribeiro: Yeah. So, secular trends, it's actually been interesting. Last year has really—COVID has expedited some of the secular trends that we have seen in emerging markets. Somewhere they already have been there, as we know, sort of, the rise of the middle class and how that has really triggered consumption in emerging markets. So, those are there. Those long-term trends have not changed. What we are seeing more short term in terms of trends and secular trends have been, for example, digitalisation in emerging markets. That has really expedited significantly over the last year. Everybody is working from home, learning remotely, banking from digital banking. So, all of that has really pushed for more of those investments and need for 5G, for example. We are seeing that. So, that has really pushed some of the … ecommerce is obviously another one that we've seen growing a lot faster since last year. And what's really interesting is I think those trends will continue to grow much faster than they were growing before COVID, because people, once they really get, they embrace those sorts of technologies and it's really hard to go back. So, we think that those are here to stay actually.

Hall: Joe Biden has just marked 100 days as America's new President. How confident are you that the administration's more multilateral approach will benefit emerging markets?

Ribeiro: One of the things that I think is positive about this administration is that it was really hard with the last one to have any kind of visibility on the direction. So, we were sort of very … the decisions were made very quickly. So, it was difficult for us to either position the portfolio in certain ways or even getting ahead of or trying to be ahead of the pack in terms of identifying opportunities for the portfolio. Here, with this administration, I think, what we see so far at least is that the positions of the government seem to be a lot more clear from the get go. So, we know what it is that he is going to be, for example, investing on. So, environment is clearly a big part of his agenda from the very beginning. So, that is obviously giving … we are starting to really, we already had exposure, but also starting to think where else can we find opportunities here.

Investments, for example, he is talking about infrastructure—investments in infrastructure, significant investments in infrastructure in the US. So, that can also help us position the portfolio or already own names that we own in the portfolio that could be beneficiaries of those types of investments. So, it's a bit more visibility into the future versus what we had before. And that's actually gets positive. So, it's good on that front. On more of the geopolitical side, it could be more challenging, because clearly, he is signaling so far that he is going to take pretty significant stances versus others, and some of those countries are emerging countries.

Hall: Yeah.

Ribeiro: So, that is yet to be seen how that evolves over time.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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