Three attractive emerging-market growth stocks

published 27 April 2018

A professional investor tells us where he'd put his money. This week: Chetan Sehgal of Templeton Emerging Markets picks three solid growth stocks.

Emerging markets are at the forefront of a changing world. Not only have they embraced the use of technology, but they have become innovators in areas from mobile banking and shopping to robotics, autonomous vehicles and health care.

Given the strong rally witnessed in 2017, many investors are wondering if such equities have further to run in 2018. However, we believe emerging-market economies look poised for further growth. The International Monetary Fund is forecasting 4.9% GDP growth for emerging markets in 2018, up from a growth rate of 4.7% in 2017.

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Technology and domestic consumption are sectors driving this growth. Rising wealth is another driver, and as incomes rise so should the demand for goods and services. As consumers meet their basic needs, aspirational wants usually follow. This "premiumisation" trend could boost demand for high-end items such as luxury cars or services such as entertainment and wealth management.

A good entry point

Through its joint venture with car manufacturer BMW, Brilliance China Automotive (Hong Kong: 1114) offers a solid opportunity to tap into the trend of premium consumption across China. The firm manufactures and sells cars for the Chinese domestic market. This includes the domestic production of BMWs, Renault minibuses and light commercial vehicles, as well as internal combustion engines for BMWs through its subsidiary, Xinchen China Power.

China recently announced plans to lift foreign-ownership restrictions in the automobile sector over the next five years, leading to a correction in the shares of Chinese automobile-equipment manufacturers including Brilliance China. We, however, continue to maintain a positive view on the joint venture and do not expect any major changes in the foreseeable future. In our opinion, the current sell-off could provide investors with an attractive entry point.

Driving a digital revolution

E-commerce is still a penetration growth story, resonating in several markets with consumers increasingly using multiple devices for online shopping. Traditional ways of doing business are losing ground to the digital revolution, which introduces innovative new ways to personalise a shopper's experience.

Chinese online retail giant Alibaba (NYSE: BABA) has employed big data in its algorithm since 2016, enhancing personalised and real-time recommendations, and improving click-through rates and monetisation. It is also exploring fintech solutions, tapping into the tech literate but financially underpenetrated population with its online and mobile payment system, Alipay.

Internet and media group Naspers (Johannesburg: NPN) has operations across emerging markets. Its most significant investments are some of the world's leading technology companies, including China-based Tencent and Russia-based Mail.ru. A large part of Naspers' appeal is the fact that its shares trade at a discount to the value of its underlying investments. The firm's shares recently retreated after it trimmed its stake in Tencent by 2% to raise $9.8bn for e-commerce investments, but it still retains a 31.2% stake in Tencent.