Our approach is to focus on quality companies, defined as those that have achieved a return on capital persistently above the cost of capital over time. These companies often pay a dividend as a result of the profitability they have generated in cash terms. Seen this way, the dividend is very much an outcome: a marker of the company’s economic productivity, and therefore, we believe, more likely to be sustainable and capable of growing over time.
This approach is distinctive in emerging markets, where it steers us away from the commodities roller-coaster and the cyclical sectors that accompany it, and towards companies with the more consistent, stable financial characteristics that we seek.
Three emerging market stocks to consider
Elite Material (Taipei: 2383) is one of the companies we own with exposure to hardware used in the AI-supply chain. The company is the leading producer of halogen-free copper clad laminate materials used in printed circuit boards, which have applications in IT infrastructure and cloud computing, but also in consumer electronics.
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A key attraction of this long-held position is the company's ability to adapt to the changing demand cycle we have seen in information technology over the past five years. Thanks to a dominant position in a product that can be used in numerous applications, the company has been able to benefit from these varying peaks in demand and the current boom in spending on AI servers. Reflecting the recent enthusiasm in the market for AI stocks, the share price has more than doubled over the year to date. The company trades on just over 23 times forecast 2026 earnings.
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Yili (Shanghai:600887), China's largest dairy company, produces fresh and Ultra High Temperature milk (representing around two-thirds of revenue), milk powder, and dairy products including yoghurt and cheese. China’s dairy market has been structurally challenged in recent years, but there are early signs that the supply-demand balance is starting to improve, which should ultimately lead to a recovery in milk prices.
Dairy consumption is at relatively low levels, particularly in comparison to developed markets, and we expect this to increase over time as consumer spending rises. At the same time, the company’s leading position across multiple categories and price points gives it a degree of pricing power. These two factors are the twin forces that should provide a strong tailwind. Scale also brings considerable distribution advantages. The company trades on 16 times forecast earnings and the trailing dividend yield is 4.5%. Earnings are expected to grow 10% next year.
Hypera (São Paulo: HYPE3) is a Brazilian consumer-pharmaceuticals group that has acquired a portfolio of market-leading brands in diverse categories such as pain relief, flu remedies and digestive health. The product line also includes dermatology and vitamin supplements.
The company has recently undertaken a programme to reduce excess working capital, a process now largely complete. Although the business is somewhat seasonal owing to the prevalence of cold and flu medicines in the company’s product range, we believe the valuation of the company to be very reasonable given the underlying quality on offer. The stock trades on 14 times forecast earnings and yields 4.7% on a trailing basis.
