Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: James Syme, senior fund manager, JOHCM Global Emerging Markets Opportunities Fund.
The anticipated winding down of quantitative easing (QE) in America poses challenges for many emerging markets. This is especially true of those dependent on foreign capital: stock markets in Brazil, India and Indonesia, which have sizeable current-account deficits, have been particularly hard hit. But QE tapering' is only on the table because the US economy is improving. This moderate revival presents opportunities for emerging-markets-based exporters with world-class brands and technology. These companies will be helped by the recent sharp drop in many emerging-markets currencies against the dollar.
South Korea's Samsung Electronics (LSE: SMSN) is one emerging-markets company that has become a world leader. With a market capitalisation of $170bn, and $30bn in cash on its balance sheet, Samsung is the biggest stock in the MSCI Emerging Markets Index. It is one of only two profitable mobile-phone handset manufacturers (the other is Apple, which sells far fewer units). It is also a major player in semiconductors and chips.
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Its share price has slipped in the general emerging-markets sell-off and has been hit by concerns over falling handset margins and fears that the smartphone market is saturated. But smartphone sales are not about to collapse. And Samsung's paltry valuation (it trades on less than six times 2014's estimated earnings) is compelling, given that it will be at the forefront of evolving technology in 4G phones, tablets and wearable mobile devices.
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Our next two picks take us to India, which is struggling with slowing growth, a weak current account and a sickly rupee. Yet this looks a good opportunity to invest in two quality companies that offer attractive long-term growth, irrespective of the domestic backdrop.
Tata Motors (NYSE: TTM), probably best-known in Britain as the owner of Jaguar Land Rover (JLR), has modernised these quintessentially British brands, while applying its knowledge of emerging markets to good effect. JLR has rolled out new models, such as the Jaguar F-Type and Range Rover Mk IV, which appeal to the rising numbers of affluent consumers in China and other markets. Demand for luxury cars is also recovering in America and Europe, as the economic outlook improves. Tata's share price is back to where it was a year ago, but its prospects remain bright.
An interesting long-term domestic play is HDFC Bank (NYSE: HDB). It has lost about a third of its value since the sell-off started in May, leaving this well-managed, conservatively run Indian bank trading at very cheap levels relative to its history. This is a highly profitable operation (HDFC boasts a 21% return on equity), with 28 million customers and a network of 3,000 branches across 1,800 towns and cities.
This vast 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 lost access to short-term money-market funding. Indian interest rates will rise from here to defend the rupee, but HDFC's lack of reliance on money-market financing and its high-quality loan book leave it well placed to ride out the storm. This stock has returned 4,300% since July 1990, in US dollar terms, against a 200% return for the MSCI Emerging Markets Index. In our view, it is a stock to buy on the dips and hold for the long term.
