EM Fund Stock Picks & Country Commentaries (June 6, 2023)
A range of emerging market fund stock picks from South African fund managers this week plus avoiding value traps, don't hope for corporate activity and when a commodity ETF makes more sense.
A range of emerging market fund stock picks coming from South African fund managers (who have first hand experience living and working in a country that is divided between a developed and an emerging or frontier market environment) this week include (among other stocks getting mentions later in this post):
Some detailed discussions about eCommerce or food delivery platform stock picks mostly operating in emerging markets.
An Asia based sporting goods stock who owns the global rights to some well known sporting goods and golf related brands.
A South African education stock pick with well-established school or university brands in a couple of African countries looking to expand further around the continent where there are enormous opportunities for education providers.
A number of South African REIT or property stock picks, many have invested in Europe and Eastern Europe in particular (which is driving growth), plus the Big 4 South African banks (all have international operations and 6-9% dividend yields).
A South African fashion and lifestyle retailer with a global presence plus another retailer who has the largest store footprint in Southern Africa.
Two South African infrastructure construction stocks with operations all over Africa plus further afield.
Some conglomerate type stocks. One is benefiting heavily from an oil investment in another African country where several successful oil finds have recently been made.
A beaten down Latin American fintech stock who’s longer term trajectory remains promising.
A Latin American oil and gas stock focused on redevelopment of mature production fields located onshore and offshore.
I find South African restaurant operators, consumer or retail stocks to be interesting as some years ago, a South African retail expat explained to me the peculiarities of South Africa’s retail and consumer markets. For example: He explained how an investment banker living in upscale Sandton who has a mortgage, car payments, and needs to invest for retirement might only be willing to pay US$40-50 for a pair of jeans from a hypermarket or discount fashion store. However, a guy living in a township might save for months and spend hundred of dollars on a designer pair (I bet the same dynamic applies to eating out…). He further explained how foreign retailers often do not understand this consumer dynamic about South Africa (or for that matter, other emerging or frontier markets) - a reason they often fail there.
Take Walmart. They seem to only understand American and Mexican consumers and tend to either struggle or fail everywhere else they operate (e.g. Walmart doubles down on Africa despite a decade of frustration).
However and as detailed in our May 22 post and in this 8 minute video, South Africa is more or less experiencing societal and “state collapse” with the private sector increasingly being forced to take over traditional government roles:
This 23 minute BBC documentary uploaded June 1st is particularly dark (and comes with plenty of anti-coal and green transition talking points that you come to expect from western state-sponsored media…):
Nevertheless, many of the South African stock picks (also see our South Africa tagged tear sheets) in this post have expanded their operations well beyond the country and Africa (e.g. a number of local property REITs have assets in the UK, Europe and Eastern Europe in particular) albeit the bulk of their revenues may still be SA derived. They also maintain listings on foreign stock exchanges (e.g. London or Frankfurt) while large cap foreign (often UK) stocks still have secondary listings on the JSE for local funds to invest in.
One of South African funds in this post pointed out how domestic stocks offer good stock picking opportunities, but avoiding value traps is critical. This would be good advice for anyone investing in emerging and especially frontier markets along with China where stocks (or rather P/E ratios) look “cheap.”
South Africa has probably not hit bottom yet as a country and this winter will not be pleasant for many South Africans. Whether the private sector and civil society can effectively take over all the roles the government is failing to do (like keeping the electricity on for a reasonable cost) remains to be seen.
Another South African Fund mentioned how they have opted to invest in a particular commodity’s ETF (one that benefits from EV battery demand) as its less risky than owing the underlying mining stocks at this point in the commodity cycle.
I am not always a fan of ETFs or ETNs. While they offer cheap exposure to a particular market or sector, emerging or frontier market ones are sometimes poorly constructed, don’t have much trading volume or assets under management (meaning they are subject to being liquidated or consolidated with other funds when fund managers reorganize or cull their product offerings), and don’t represent the underlying market as well as they should (e.g. VanEck Vietnam ETF (VNM): Flawed But Still an Easy Way to Cash in on Vietnam’s Frontier to Emerging Market Upgrade).
ETFs can also distort the market as you get a bag of good stocks that are not being rewarded as much as they should be for being good stocks along with some bad stocks that are not being punished for being bad stocks. Finally, commodity ETFs or ETNs that try to replicate commodity pricing by investing in “paper” or contracts also need to be closely examined.
What are benefits of owning commodity ETFs or ETNs in lieu of the underlying mining stocks? New mines are expensive to build and often come with cost overruns (as our March 14 post noted about Chile where copper ore quality is also falling) while South Africa is experiencing disruptive “loadshedding” (a nice term for rolling blackouts) and mining stocks there can be the subject of labor unrest (especially as inflation eats into miner salaries). These sorts of troubles hurt individual mining stocks, but are good for commodity prices.
The same fund also noted an upswing in corporate M&A activity in the mining sector. This is something for investors to be concerned about as miners have historically not added value to their shares or for investors with such activity. This also makes individual mining stock selection more difficult as the potential for M&A (and the failures that can arise from it) must be considered.
The main downside with owning commodity ETFs or ETNs? Aside from concerns about how the they are constructed or replicating the market, they don’t pay dividends for income investors.
Finally, one fund noted how the South African telecom is worth more than its share price along with it’s potential breakup value (even though it’s legacy businesses are shrinking and not yet being offset by new growth areas). However, the South African government also has a stake in the company - meaning any breakup plan or spinoff deal would take years to negotiate and complete.
Owning a particular stock in the hope of medium to longer term corporate activity is often not a good investing strategy - even if your time horizon is not short term.
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