“The upside is equities” despite macro woes

Fidelity’s Ashish Swarup argues that owning high-quality companies in emerging markets is the only way investors can regain their footing.
“The upside is equities” despite macro woes

Despite many ugly news headlines these days, there remain plenty of emerging markets enjoying high rates of growth, and it is there that investors must go if they are to achieve long-term goals, says Ashish Swarup, London-based portfolio manager for global EMs at Fidelity Investments.

Speaking at AsianInvestor’s Korea Institutional Investment Forum in Seoul last week, Swarup says it is unprecedented to see so many sizeable countries throughout the emerging-markets world growing so quickly at the same time, reaping the fruits of their governments adopting rule of law and property rights in the 1980s and 1990s.

That growth is under pressure now that the developed world is growing slowly or not at all, and global investor flows have been into DM government bonds. However, Swarup says ultra-low interest rates and graduation of leading emerging markets to investment-grade status has capped the upside in fixed income.

“The upside’s all in equities,” he says, adding that active managers can do well in these inefficient markets thanks to the paucity of company research and current low valuations.

However, investing in EM equities is difficult. EM index volatility is twice that of the S&P 500 Index, and these countries are marred by weak institutions; their move towards rule of law is flawed. They are too often dependent upon commodity prices or exports to the West, making them cyclical plays rather than reliable long-term bets. And corporate governance remains poor, with little to no protection for minority investors such as Fidelity.

Those challenges, however, present ways for active managers to outperform. EMs are diverse, so a one-size-fits-all approach won’t work. An investor can mitigate some volatility by, for example, buying an index of companies in the more globalised export sectors while picking stocks in domestic stories such as healthcare.

Swarup notes that most markets boast at least a few companies with excellent management, which enjoy a high barrier to entry and a sustainable industry structure. For example, he likes names such as Larsen & Toubro and Tata Group companies in India, which stand out for their quality amid an infrastructure setting prone to corruption. On the other hand, he avoids state-owned enterprises (which, he says, keeps him underweight markets such as Russia).

He also says macro analysis needs to be more specific than just reading newspaper headlines about GDP figures. Some of the macro factors he considers include housing for the US, bank lending for Europe, and, for China, new loans, power usage, exports and new property sales.

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