For emerging and frontier markets 2018 was a year to forget. Investors were unnerved by trade barriers, a strengthening dollar, tighter monetary conditions and weaker commodity prices. However, emerging and frontier markets have now priced in a lot of bad news. Indeed, the valuation gap between emerging markets and developed markets is near an all-time high: the former's price/earnings (p/e) ratio is 27% below the latter's.
Moreover, in the past two months confidence has returned. Oil prices and the US dollar have fallen, while monetary policy has become more accommodating and stimulus measures in China should bolster growth. This is an auspicious backdrop for the newly formed Mobius Investment Trust (LSE: MMIT). We aim to identify companies with resilient business models that are undervalued and mispriced. This involves an active investment style, engaging with portfolio companies' management to unlock value.
We focus on small- and mid-cap companies, which are particularly attractive as they are more agile, more flexible in responding to a fast-changing environment, and often neglected by the market. These companies are also often led by determined entrepreneurs. As a newly established firm ourselves, this is something we at Mobius Capital Partners can relate to.
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A burgeoning Korean biotech
Hugel (Seoul: 145020), a South Korean biopharmaceutical company, manufactures products for medical aesthetics and therapeutics, including botox and cosmetics, and has grown market share in South Korea from 0% to approximately 40% in eight years.
We managed to buy Hugel shares at a deep discount relative to its peers and its own history amid negative sentiment around its exports. It is well placed to benefit from global demand for its products.
Indonesia's top department store
In Indonesia we have invested in one of the world's most profitable retailers, Matahari Department Store (Jakarta: LPPF). Matahari sells a wide array of fashion, accessories, beauty and homeware products across the Indonesian archipelago. It has a dominant position within its target segment of middle-income Indonesian consumers, which comprise more than 50% of the population a cohort larger than the entire size of Mexico.
Matahari's scale provides bargaining power over suppliers, allowing the company to outspend peers on fixed costs. We believe this formidable distribution and logistics network could also appeal greatly to many well capitalised e-commerce players. Nonetheless, at the time of investment the valuation of Matahari's shares had de-rated to an all-time low.
Brazilian car parts
Brazil's Iochpe-Maxion (Sao Paulo: MYPK3) is a leading global producer of car parts including wheels and chassis components. The business acts as an international partner for original equipment manufacturers, with 31 plants in 14 countries. This reach affords it significant advantages against its rivals, who typically operate on a regional scale, while its focus on innovation allows it to maintain a sustainable competitive edge. Given the opportunity in aluminium and premium-quality wheels, we are very excited by its future growth potential.
Carlos von Hardenberg is a founding partner of Mobius Capital Partners
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