EM Fund Stock Picks & Country Commentaries (February 28, 2023)

EM fund stock picks for China, Taiwan, India, Vietnam, and Latin America are in focus this week (along with other emerging or frontier market countries and regions) as we cover a number of January fund factsheets and updates. It seems for the month of January, EM funds shifted out of Indian stocks (a bit overvalued) and into North Asia (China along with Korean and Taiwanese stocks).

However, an India fund noted Foreign Institutional investors (FIIs) were net sellers (by US$3.0 billion) in January while domestic institutional investors (DIIs) were net buyers (by US$4.1 billion). Usually locals know more about any on the ground market and valuation conditions than foreigners. However, other reasons could include a lack of more suitable investment options for locals versus foreign fund managers who were following the herd back into Chinese stocks.

Nevertheless, Korean and Taiwanese stocks also performed well thanks in part to China’s reopening along with the adoption of positive tax policies designed to help chip makers and semiconductor stocks. While the latter sectors remain weak due to the slowing global economy, a food conglomerate stock and a retail & F&B conglomerate stock could be the main beneficiaries of a recovery in domestic consumption while China’s post-lockdown “revenge spend” could be stronger than what was seen in the Western world thanks to much higher savings rates.

The cyclical pattern of yearly Vietnam stock returns was also observed by a couple of EM funds and bodes well for a good performance this year (albeit it remains a question mark as to whether the Vietnamese stock market can recoup most of last year’s losses in 2023). However, investors who are NOT a fan of ESG ideology may want to keep an eye on any Vietnam government and/or EM fund efforts to push it upon Vietnamese stocks.

One SE Asia fund noted how the next step for Indonesia is to invite battery companies and EV auto manufacturers to set up factories to create an end-to-end EV supply chain in the resource rich country. Over the longer term, a domestic EV market would help Indonesia’s trade balance by reducing fuel imports.

Outside of Asia, a Latin America fund “shifted risk” from Mexico to Brazil (despite admitting the former has benign politics and solid economic trends) by reducing positions in a Mexican industrial real estate stock and a beverage and retail stock. However, if previous Lula administrations serve as a guide (see Operation Car Wash), the time to start new positions in Brazilian stocks might be later in his Administration – when they may become significantly cheaper.

Some interesting stock picks this week include one that makes a consumer product considered to be a popular last-minute airport gift for family back home (because its not fake when purchased at an overseas airport); an appliance and electronics stock who just launched an employee stock ownership plan which should help share prices over the longer term; a materials stock focused on carbon fiber composites and fine chemicals for the wind power business; and several Indian stocks.

Whilethe overall India stock market might still be considered overvalued and is getting impacted by the Adani scandals, there are still good stocks with solid businesses to invest in there. Investors just need to be mindful of the current valuations and any more corporate governance issues that could appear under more scrutiny in light of the Adani controversies.

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Asia

The January Factsheet for Henderson Far East Income Limited (LON: HFEL) summed up the month nicely by noting howChina’s reopening

…led to a sharp upward move in China, while Taiwan and South Korea also rebounded strongly as beneficiaries of Chinese trade and tourism and supported by the strength of technology sectors such as semiconductors and hardware.

And:

These events created a more favourable demand environment for materials, as copper and iron ore strengthened, and also for sentiment towards technology products and services. This more positive outlook ensured that materials and information technology were two of the strongest sectors. The strength of materials favoured Australia which was one of the strongest markets along with North Asia.

Finally, the fund noted:

However, despite this uncertainty Asia equity valuations continue to look attractive relative to global equities while inflationary pressures are less pronounced. We are confident on the outlook fordividends considering the excess cash being generated and the low level of dividends paid out compared to earnings.

To read more, please visit this article on Substack after Tuesday, 9AM EST.

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