Head east to find growth stocks

It’s a good time to be an exporter based in emerging markets. The modest US economic revival and the wider recovery in developed-world demand presents opportunities. This is especially true for exporters with global brands and an edge in technology. Two of the three stocks we highlight in this article are indeed export plays. These exporters are helped by the sharp depreciation of many emerging-markets currencies against the dollar over the past year.

Incidentally, if you feel a sense of déjà vu by the end of the article, it is because the trio below are the same stocks we highlighted in this column in September 2013. They have performed well since then and remain reasonably priced growth prospects for the long term.

Optimism abounds in India after Narendra Modi’s landslide victory in the recent national elections. This positive sentiment has triggered a rally in the Indian stock market – the BSE Sensex index is up 12% in US dollar terms since early May – and the market could well climb far higher over the next year or two.

As the owner of India’s second-largest truck company, Tata Motors (NYSE: TTM) is well-placed should the Modi administration succeed in unleashing the country’s tremendous economic potential. Tata has already done a great job with Jaguar Land Rover, and has modernised these quintessentially British brands by rolling out new models.

Business is booming and that generates a compelling combination of growth and high margins. A continued recovery in the West and increasing numbers of affluent consumers in the developing world suggests the outlook for the Jaguar business remains rosy.

Staying with India, an interesting domestic play is HDFC Bank (NYSE: HDB). This is a well-managed, highly conservatively run, extremely profitable operation (HDFC Bank boasts a 22% return on equity), with a network of 3,400 branches across over 2,000 Indian towns and cities.

This enormous deposit-gathering franchise means HDFC is less susceptible to the funding risks that proved to be the Achilles’ heel for many banks during the financial crisis, when they effectively lost access to short-term money-market funding.

A recovery in the Indian economy should lead to further loan growth and increased demand for financial products in general. This is a quality, defensive growth stock that has returned over 6,000% since July 1990, in US dollar terms. In our view, it represents a stock to buy on the dips and hold for the long term.

South Korea’s Samsung Electronics (LSE: SMSN) is now firmly established as the world’s largest mobile-phone maker. The company is also a major player in semiconductors and memory chips – a stable and profitable market. With a market cap of US$190bn and holding US$40bn in cash, this giant is the largest stock in the MSCI Emerging Markets index. The stockmarket has been worried about falling margins in the mobile-handset market amid intense competition and slowing smartphone demand in the developed world. Nonetheless, Samsung’s mobile-phone unit remains highly profitable, while the stock continues to trade on a single-digit price/earnings ratio. The Samsung group is undergoing a restructuring that should lead to a generational change in ownership. This organisational and ownership rejig looks like being accompanied by a significant return of capital to shareholders, possibly through a one-off special dividend.


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