Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: James Syme, manager, Global Emerging Markets Opportunities Fund, JO Hambro Capital Management.
When investing in emerging markets you need to start at the top. We believe that getting the country decision right is the key to investment success. We analyse a number of factors growth, liquidity, currency, macro-management politics and valuations in order to find the most attractive markets before selecting stocks.
We hold Malaysian, Korean, Colombian and Thai firms, among others. Our top-down approach currently leads us to favour Brazil, Russia, India and China (BRICs), which, with the exception of Russia, are all represented in our three stock picks below.
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Baidu (Nasdaq: BIDU) is China's answer to Google and makes its money from advertising revenue. Google's withdrawal from China in 2010 has effectively given Baidu a free run at the world's busiest internet search market, which continues to see powerful growth. While China may finally be slowing, efforts to rebalance the Chinese economy towards services and domestic consumption should benefit Baidu.
It is also profiting from the huge and ongoing move towards smartphones among Chinese consumers: China has over 50 million people whose only form of internet access is the phone. Given that the Chinese Government will not relinquish control of internet, television and telephony to foreigners, Baidu occupies an unassailable market position.
On to Brazil, where we like Brazilian aerospace conglomerate Embraer (NYSE: ERJ), a company that produces commercial, military and executive aircraft and ranks as the world's third-largest commercial plane maker. There are a number of reasons why we are positive on this stock. Firstly, it is a direct beneficiary of a recovering US economy: travelling around the States last week on business, two out of my four internal flights were on Embraer planes.
An improving US economic picture can only be good news for the Brazilian manufacturer. Regional airlines in the developing markets of China, India, South-East Asia and in its own Latin America backyard are all experiencing strong growth. The need to replace fuel inefficient planes is also accelerating the aircraft replacement cycle among airlines.
In particular, the requirement to overhaul the world's ageing fleet of Boeing 737s, the workhorse of the skies, affords a tremendous opportunity, while the corporate jet market is another area where Embraer should make progress. Boosting this drive in international markets is the explicit policy of the Brazilian central bank to support the country's exporters through active management of the Brazilian real exchange rate.
Our final stock pick takes us to India and HDFC Bank (NYSE: HDB). Emerging markets banks tend to be run in a conservative, traditional manner. They collect deposits and make loans at high enough interest rates that, after costs and provisions for non-performing loans, there is a sufficient profit.
HDFC Bank is typical it's a high-quality operation with a strong balance sheet, large branch network and a great track record of growth. From a competition perspective, it should be a beneficiary of the increasing regulation of non-bank lenders.
That the Indian economy has slowed sharply means we can expect lower inflation over the next few quarters. This in turn means we can expect interest-rate cuts that will support Indian banks' growth. HDFC Bank isn't the most aggressive way to play the Indian interest-rate cycle, but it's a high-quality, defensive growth stock.
James Syme is manager of the JOHCM Global Emerging Markets Opportunities Fund.
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