EM Fund Stock Picks & Country Commentaries (October 3, 2023)
EM Fund Stock Picks & Country Commentaries (October 3, 2023)
Emerging market fund stock picks (fund manager interviews, etc.) + investment themes are just as important as stock picking, traditional asset allocation breaks down (can energy replace bonds?), etc.
We have a variety of emerging market fund stock picks (mostly from fund manager interviews) to highlight this week (among other stocks also getting mentions late on in this post) with some quick takes being:
A transformer manufacturing stock pick that should benefit from longer term China plus one trends.
Three Indian financial stock picks that are probably not well known outside of India, but could become multibaggers.
A publishing or printing stock pick with unique concept that will disrupt the whole publishing industry because they are doing just in time publishing or book printing on demand.
An automated parcel locker network operator who has the potential to shake up the postal and delivery business with their locker concept.
A stock pick that finances lawyers and clients to engage in litigation, arbitration, asset recovery and other legal finance activities who just received a massive judgment on some acquired Argentina claims.
In one recent interview with a well known emerging markets investor that mostly covered India, the investor indicated he is not keen on banks because he does not know where the bad loans are.
However and in another interview, an Indian fund manager (who would be well-known within India) said that over the past 10 to 15 years, there have been 2, 3, or 4 multibagger opportunities a year in the Indian financial space. This would be another good example of the differences in thinking and investment strategy between an international emerging markets fund manager who merely visits emerging markets versus a local fund manager who actually lives in one (Of course, foreign fund managers often have restrictions on what they are allowed to invest in - like state owned banks in EMs).
He also explained that to make money in the markets, you have to work on the company, but the theme is also equally important. For example: He is focused on green energy and China plus one themes for India, but maintains a 3 to 5 year time horizon.
Having the right themes (just like picking the right countries as discussed in some recent posts) does make sense and we have discussed some China investment themes being used by foreign fund managers in past posts. But as noted, these are often crowded trades as many foreign fund managers have a herd mentality when it comes to following the same themes into the same stocks.
In another recent podcast focused on Latin America, a fund manager explained how investors always hope a moderate centralist right candidate will emerge from elections. But he explained why this may not matter much. For example: Bolsonaro may have said controversial things; but he allowed his finance minister to manage the economy, the Central bank remained independent, etc. Lula has also appointed a pragmatic rather than a political finance minister. In other words, what ultimately matters are fiscally responsible policies and the central bank being free to do its job as that will remove or lower country risk premiums.
Finally and in another investor interview, it was noted how the traditional 60-40 equity to bond asset allocation model is no longer working given the current situation with most OECD bonds. However, most portfolios still work on the premise of a negative correlation between bonds and equities. He believes energy could be the new anti-fragile asset of choice for diversifying portfolios as traditional asset allocation models break down.
I would add that investors might want to also look at investment opportunities in emerging and frontier markets in general e.g. stocks in sectors of such markets that don’t have as much correlation with what is happening in OECD countries or geopolitically.
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Asia
East Asia
China
Jim Chanos appeared on a Bloomberg podcast and had some interesting things to say:
Jim Chanos Talks Short Bets, China Risks and "Dumb Money" (YouTube) 15:56 Minutes (Bloomberg Podcasts) September 2023
Famed short-seller and "Perma-Bear" Jim Chanos discusses his skepticism of Arm's valuation despite its successful first day of trading, the risks China poses to global economy and how to invest in the era of AI.
Regarding China, Chanos explained that the real estate risks there do not have much contagion risk to western or American banks. The risks are in equity and debt investments that funds and retail investors hold. He is also concerned about less money loosing high-speed train investments and more spending on aircraft carriers and the like - just like in the 1930s. In other words, spending less internally and more externally.
Chanos said they are short less on China because their stock market has been flat for the last 12 years as every other market has tripled or quadrupled. They have some direct shorts in the financial area (4-6% of their portfolio), and some indirect ones on those dependent on China.
Given the investment driven model, Chanos commented that Chinese GDP numbers are actually accurate (as they put in enough investment to get the numbers they want…). The problem is the quality of the GDP in the form of bad debts that sits in the banks and must be inflated away.
On the subject of AI, Chanos pointed out that new technologies often end up harming as many companies as they help. He also thinks many companies will find their moats getting breached e.g. companies using AI to design their own software applications, etc.
Interestingly enough, Chanos said we are in the “golden age of fraud” in the financial markets now. What bothers him is that much of the fraud hides in plain sight now in the way a company produces its numbers e.g. adjusted earnings are the norm, etc. He wonders if these are businesses or “executive enrichment schemes...”