Pick Stocks, Not Countries, in Emerging Markets (FE Trustnet)
Katie Kochhas, the global head of client portfolio management and business strategy for Goldman Sachs Asset Management, has recently written an article for FE Trustnet to say that investors should look at individual stocks rather than countries when investing in emerging markets. Kochhas explains that the diversity of emerging markets means individual countries and stocks may react quite differently – even to common themes. For example:
- Peruvian Banks. Despite the negative effect of weak copper prices on Peru’s economy, Peruvian banks are attractive because they face lower competition and have less leverage than banks in many other emerging markets. This may enable Peruvian banks to earn above-average returns.
- Russian Food Retail. Although the near-term outlook for Russian consumers is weak, Russia’s fragmented food retail sector is in the process of formalizing. This is creating opportunities for companies with good brands, competitive advantages and strong management teams to grow.
Kochhas also mentioned a few sectors they like or are avoiding. For example:
- In most regions, they continue to have less exposure to state-owned enterprises (SOEs) because due to concerns about government influence, inefficiency and the poor allocation of capital. Its also worth pointing out that since SOEs account 29% of the MSCI Global Emerging Markets index, they look for mid cap and small cap emerging market stocks outside of the benchmark.
- They like stock exchanges and own shares in a number of country stock exchanges because these are capital-light companies with virtually 100% conversion of earnings to cash flow plus attractive valuations with 4 to 7% cash flow yields. Stock exchanges also tend to be monopolies and largely insulated from competitive pressures.
- They struggle to find attractive opportunities in telecommunications because they believe the industry is very competitive. Moreover, telecommunication stocks have high capital needs that do not generate adequate returns on that capital.
Kochhas then goes on to talk more indepth about investing in India and China before concluding her article by writing:
Macro factors will influence economies, markets and even corporate behaviour in emerging markets. However, we believe that widening the range of investment opportunities, by considering off-benchmark and smaller-cap companies, and focusing on micro drivers of stocks, offer the greatest chance to generate sustainable alpha.
To read the whole article, Why you need to pick stocks, not countries, in emerging markets, go to the website of FE Trustnet.
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