Each week, aprofessional investor tells us where he'd put his money. This week:Xavier Hovasse of Carmignac Gestion
Emerging markets have rebounded strongly since January, benefiting from a more clement economic climate. Stronger commodity prices, a weaker dollar, a more dovish stance from the Fed, ongoing monetary policy accommodation and stabilisation of key indicators in China have combined to give a number of emerging markets a new lease of life. However, structural problems remain intact: weak global trade, discouraging developed-market growth, high leverage and excess capacity issues.
Going forward, investors will have to steer a difficult course between Latin America's positive political changes, China's economic transition, India's promising reform process and turmoil in the Middle East. In this uncertain and fragile climate for emerging markets, investors should focus on picking the regions, sectors and stocks that combine the ability to generate cash with virtually secular growth prospects. Countries with healthy macroeconomic fundamentals offering high domestic growth and sound (or improving) current-account balances should perform better. Asian economies stand out in this regard, as they are by and large still running record current-account surpluses. Further afield, political developments in Brazil and Argentina are also supportive.
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Diligent investors will find pockets of growth in a number of sectors in Asia, but also in regions with weak economic prospects. For example, insurance remains a largely under-penetrated market in Brazil, offering long-term growth potential. We are invested in the country's leading insurer, BB Seguridade (Brazil: BBSE3), which has a strong position in life insurance. Another interesting sector is e-commerce. Companies such as MercadoLibre (New York: MELI), which is the undisputed e-commerce leader in Latin America and has a particularly strong presence in Brazil and Argentina, will be the key beneficiaries here.
Emerging-market indices include a large fraction of companies that are either highly leveraged or unprofitable. We would therefore recommend focusing on business models with strong cash flows and ideally no debt, which are able to finance their growth on their own and are better placed to navigate market turmoil. For example, consider China, where compelling investment opportunities are still plentiful, but the overall stock of debt is worrying.
Here we own almost exclusively companies with strong cash generation and net cash balance sheets, such as Zhengzhou Yutong Bus (China: 600066), an electric bus manufacturer. As the market leader in its segment, Yutong is poised to reap the benefits of the growth prospects for electric vehicles especially given the current anti-pollution campaigns in China and should be able to do this without increasing leverage or diluting existing shareholders by raising new equity.
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