The only three emerging-market stock pickers who avoided losing money for clients in the worst first-half rout since 1998 say now’s the time to buy Philippine retailers, Chinese Internet companies and Indian drugmakers.
Lewis Kaufman, whose Thornburg Developing World Fund (THDAX:US) rose 3.2 percent, the most among U.S.-domiciled emerging-market mutual funds overseeing at least $100 million, says Manila-based Puregold Price Club Inc. (PGOLD) will benefit from 20 percent sales growth. CNI Charter Emerging Markets Fund (RIMIX:US)’s Anindya Chatterjee boosted his position in Shenzhen, China-based Tencent Holdings Ltd. (700) as first-quarter profit rose 37 percent. David Semple has been buying Indian pharmaceutical shares for the Van Eck Emerging Markets Fund as the rupee’s tumble boosts exports.
The managers say they weathered this year’s 15 percent slide in the MSCI Emerging Markets Index by making prescient currency bets and buying companies insulated from economic swings and government interference. All 89 of their rivals tracked by Bloomberg posted losses as the U.S. Federal Reserve said it may reduce monetary stimulus, while a cash crunch in China worsened and protests turned violent in Turkey and Brazil.
“It’s been an environment where if you picked the right spots, there’s been enough going right to offset the things that are going wrong,” Kaufman, whose fund has about $728 million of assets, said in a June 19 phone interview from Santa Fe, New Mexico. “And there are a lot of things going wrong.”
The MSCI emerging-markets index declined 1.9 percent to 883.34 today, the lowest close in a year.
The gauge has trailed the MSCI World Index of developed-nation stocks by 21 percentage points in 2013 through June 21, the biggest gap in 15 years. The emerging-markets index now is valued at 1.4 times net assets, the lowest level since September 2011 and 28 percent below the MSCI World Index, the biggest discount since 2005, according to weekly data compiled by Bloomberg.
The Peru Lima General Index (IGBVL), Brazil’s Ibovespa and the Hang Seng China Enterprises Index all lost more than 19 percent, the largest declines among 21 emerging-market equity measures tracked by Bloomberg. OGX Petroleo & Gas Participacoes SA (OGXP3), the Rio de Janeiro-based oil explorer controlled by Brazilian billionaire Eike Batista, slid 81 percent for the steepest drop in the MSCI emerging gauge.
Developing-nation currencies and bonds also tumbled in the first half, with India’s rupee and Turkey’s lira sinking to record lows against the dollar last week. The yield on the Bloomberg USD Emerging Market Sovereign Bond Index (BEMS) rose to 5.23 percent on June 21, the highest level since November 2011.
Even the best-performing emerging-market stock funds have declined in June after Fed Chairman Ben S. Bernanke mapped out a timetable for ending the central bank’s unprecedented bond-buying program. The Thornburg fund lost about 8.9 percent so far this month, while the CNI fund slid 8 percent and the Van Eck fund dropped 8.3 percent, according to data compiled by Bloomberg. That compares with an 11 percent retreat in the MSCI emerging-markets index.
“It’s been a very, very tough year for emerging markets overall,” Chatterjee, who started the $227 million CNI fund in December 2011 and oversaw its 1.6 percent advance this year, said in a June 20 phone interview from New York.
Brevan Howard Asset Management LLP’s $2.7 billion emerging-markets hedge fund sold positions and cut risk by more than half after it lost 11 percent this year, two people with knowledge of the matter said last week. Geraldine Sundstrom, who oversees the fund for London-based Brevan Howard, declined to comment.
The $328 million Goldman Sachs BRIC Fund (GBRAX:US), which invests in Brazil, Russia, India and China, declined 18 percent for the biggest drop among 92 U.S.-domiciled emerging stock mutual funds with at least $100 million tracked by Bloomberg. The $427 million Goldman Sachs N-11 Equity Fund (GSYAX:US), comprised of stocks in smaller emerging markets, retreated 8 percent.
“As a contrarian and believer in mean reversion, the fact that the BRIC markets have underperformed for a couple years now, that makes me very interested in those markets,” Eddie Perkin, the London-based chief investment officer for international and emerging markets equity at Goldman Sachs Asset Management, said in a June 23 phone interview. “The BRIC and growth market countries have been left behind as the world equity markets have moved ahead and there’s really good value there.”
Investors withdrew a net $18 billion from emerging-market stock funds during the past 10 weeks, Morgan Stanley wrote in a June 21 report.
While the retreat in emerging markets has left stocks “oversold,” the longer-term outlook for the asset class is still negative, John-Paul Smith, the London-based strategist at Deutsche Bank AG who predicted this year’s selloff, said in a June 20 e-mail. He said stocks in China, the biggest emerging market, may extend declines.
The World Bank lowered its 2013 forecast for growth in China to 7.7 percent this month, which would be the slowest since 1999, from an 8.4 percent estimate in January. The Washington-based lender cut its prediction for developing-nation growth to 5.1 percent from 5.5 percent, compared with the 1.2 percent projection for advanced economies.
“The situation in China is still very bearish for the emerging equity asset class over the medium and longer term,” Smith said.
Puregold, which operates supermarkets and hypermarkets in the Philippines, has climbed 9.1 percent this year. The company will probably boost sales by an average 24 percent during the next three years as profits surge at an 18 percent annual rate, according to 26 analyst estimates compiled by Bloomberg. The Philippine economy expanded at a faster-than-projected 7.8 percent pace in the first quarter, the quickest among 40 major nations tracked by Bloomberg.
“The country is on the cusp of an investment cycle which I think will filter through to the consumer part of the economy,” Kaufman said. The Philippine peso has become attractive after depreciating about 6 percent against the dollar during the past month, he said.
Kaufman also holds shares of OAO Magnit (MGNT), Russia’s largest food retailer, and PT Mitra Adiperkasa (MAPI), which operates Starbucks Corp. and Domino’s Pizza Inc. outlets across Indonesia. The money manager, who joined Thornburg in 2005 after working for Morgan Stanley and Citigroup Inc., said he has an overweight position in Southeast Asian countries, underweight holdings in the energy industry and no stocks in South Korea. The nation’s benchmark Kospi Index (KOSPI) has dropped 16 percent in dollar terms this year.
Tencent, which boosted users of its mobile messaging application by 228 percent in the first quarter to 194 million, has climbed 15 percent this year. The shares are valued at 25 times estimated 2013 profits, versus 43 times for Menlo Park, California-based Facebook Inc., operator of the largest social network, according to data compiled by Bloomberg.
The Hong Kong-traded company, China’s largest listed Internet business by revenue, was the fourth-biggest position in the CNI fund as of March after Chatterjee boosted holdings in the first quarter, according to data compiled by Bloomberg.
The fund has overweight positions in Asian consumer companies because the region’s expanding populations and high savings rates will spur growth even if the global economy slows, Chatterjee said.
Consumer spending in Asian emerging markets will probably increase 9.2 percent on average in 2013, according to Euromonitor International, a market research firm.
“In this global environment, and even over the longer term, it makes more sense to focus on domestic demand driven by demography,” said Chatterjee, who has covered Asian markets and economies for 18 years at firms including Bear Stearns Cos. and Jefferies Group LLC. “Consumption is more durable through economic cycles.”
Semple, who has managed international equity investments at Van Eck since 1998, said in a June 19 phone interview that he’s been paring some Chinese holdings and adding to Indian health-care stocks. His emerging-markets fund had Chennai-based Apollo Hospitals Enterprise Ltd. and Mumbai-based Glenmark Pharmaceuticals Ltd. (GNP) among its top 10 holdings at the end of May, according to Van Eck’s website.
Glenmark, which recorded more than 70 percent of its sales outside India in the three months ended March, has climbed 3.1 percent this year even as the benchmark S&P BSE Sensex index dropped 3.4 percent. The rupee weakened about 7.2 percent in 2013 and reached a record low of 59.98 per dollar on June 20, boosting the value of overseas revenue for local companies.
Semple, Chatterjee and Kaufman said they tend to avoid state-owned companies as slower economic growth increases the likelihood of government intervention and wasteful spending. Moscow-based OAO Gazprom (GAZP) and Beijing-based China Construction Bank Corp. (939), state-controlled companies with two of the seven biggest weightings in the MSCI emerging index, dropped more than 16 percent this year.
“Some of the less efficient emerging-market stocks are being found out in a world of lower growth,” said Semple, whose fund is unchanged this year, according to data compiled by Bloomberg. “We don’t think the index is a very good representation of what emerging markets have become. The companies we buy can do very well, even in adverse situations.”
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