“I think that if you shake the tree, you ought to be around when the fruit falls to pick it up.” – Mary Stevenson Cassatt, American painter and print maker
“Humans have a knack for choosing precisely the things that are worst for them.” – J. K. Rowling
In this week’s piece we focus on emerging markets, identifying individual stock picks to complement broad-based exposure to emerging markets. Also this week, we briefly follow-up on the cloud-based software investment ideas discussed last week.
Emerging Markets Stock Picks
Generally speaking, when it comes to emerging markets we prefer broad-based exposures – country, asset class or sector specific ETFs – as opposed to picking individual stocks. Nonetheless, to add more nuance to a portfolio the broader exposures can form the core and individual stock picks can play the role of satellites. These satellites can be a valuable source of alpha, particularly during upward trending markets.
Below we identify six stock across emerging markets that we think warrant taking single stock exposure for.
China Mobile
China Mobile $941.HK (US listed depositary receipt $CHL) is the telecommunication company with the largest mobile customer base in the world. From January through October last year, the company’s mobile user base grew by over 32 million to almost 920 million with 4G penetration of 76 per cent of the user base.
Chinese consumers, as voracious internet users, are driving a dramatic shift in China Mobile’s business model from voice to data. The launch of 5G, with its super fast transfer speeds, is likely to further accelerate the consumption of video content and the development of ‘Internet of Things’ technologies. In turn, data’s share of telecommunications companies’s revenues is only likely to increase further.
Huawei Technologies is leading the charge in the global 5G race. With anti-China rhetoric increasing across a number western states, however, Huawei is being blocked from participating in the roll out of 5G networks in those markets. Unless Huawei’s western competitors catch up on the technological front, China is likely to be the first major economy to roll out 5G.
China Mobile is well placed to benefit from the deployment of 5G in China.
The stock trades at 12.4 times 2018 earnings and a dividend yield of 4.2 per cent.
Pou Chen
Pou Chen $9904.TT is a leading footwear manufacturer in Taiwan, and the largest branded athletic and casual footwear manufacturer in the world. It manufactures footwear for major global brands such as Nike, Adidas, Asics, Clarks, Reebok, Puma, New Balance, Crocs, Merrell. Timberland, Converse and Salomon.
The company also has a vast retail network in China with over 5,400 owned stores and directly operated stores and over 3,300 sub-distributors. It is levered to the growth in sportswear consumption in China.
Given the tax cuts recently implemented by the Chinese government and decent prospects for further easing of the tax burden, we think Chinese consumption could pick-up in 2019 and in turn drive Pou Chen’s growth.
Trading at 8.7 times 2018 earnings and a dividend yield of 5.6 per cent, we think the Pou Chen offers good value at current levels.
Russian Retail: Magnit and X5 Retail Group
In Russia we like two food retail plays: Magnit (London depositary receipt $MGNT.LI) and X5 Retail Group (London depositary receipt $FIVE.LI). Both companies operate supermarkets, convenience stores and discount stores across Russia.
The food retail sector in Russia, exacerbated by intense competition, was amongst the worst performing sectors in the Russian market last year. Valuations for a number of the food retailers are now amongst the lowest in emerging markets across the industry group – more than pricing in the downside we think. Moreover, retail plays should benefit if there is a pick-up in consumer spending driven by a strengthening ruble (weakening dollar) or rising oil prices.
Magnit trades at 14.3 times 2018 earnings and a dividend yield of 7.9 per cent while X5 Retail Group trades at 14.8 times 2018 earnings and 4.7 per cent dividend yield.
Indofood
Indofood $INDF.IJ (US listed depositary receipt $PIFMY) is an Indonesian food company engaged in manufacturing instant noodles, wheat flour, baby food, food seasonings, coffee, cooking oil, and snacks. The company is the de facto leader in the Indonesian instant noodles market with pricing power to pass on rising costs but also hold prices steady during periods costs decline.
Hypera SA
Hypera Pharma $HYPE3.BZ (US listed depositary receipt $HYPMY), previously known as Hypermarcas, is Brazil’s largest pharmaceutical company by market capitalisation.
Hypera leading position in the market is driven by its low-cost positioning with the market combined continued investment in research & development. Over the coming 4 years the company is expected to significantly expand its portfolio of “power” drugs – products with the potential to reach at least Brazillian rials 100 million is sales.
With the Brazilian pharmaceutical market expected to grow between 10 and 15 per cent per year over the coming 5 years, Hypera is well placed to significantly increase its revenues and earnings in the years to come.
Moreover, with the right leaning Jair Bolsonaro coming into power, there is a distinct possibility that they new government will look to push through pro-business regulatory and tax reform. This can be a near term catalyst for the highly regulated pharmaceutical companies in Brazil.
Cloud-Based Software Follow-Up
Last week we shared an investment idea around cloud-based software providers and identified a number of enterprise focused stocks that we think attractive potential longs. This week, we identify a cloud infrastructure play and a SME focused cloud-based software provider as potential longs.
Nutanix
Nutanix $NTNX is a hyper-converged infrastructure pioneer that markets its technology as a building block for private clouds.
$NTNX is a difficult company to understand and its technologies are not easy to parse for the layman. At its simplest, $NTNX provides the basic building block for companies looking to (i) build private clouds to in-source data warehousing, (ii) to manage a hybrid structure consisting of data managed with outsourced cloud-service providers, the likes of Amazon and Microsoft’s Azure, and more sensitive data managed in a captive private cloud, or (iii) build an interface to seamlessly manage data stored with multiple cloud-service providers. Essentially, $NTNX is aiming to do cloud-service providers what cloud-service providers did to servers, commodotise them.
In addition to the infrastructure building blocks for the cloud, $NTNX provides complementary services such a processing, networking and multi-cloud optimisation that it can use to up sell clients after the initial sale.
HubSpot
HubSpot $HUBS is a developer and marketer of software products for inbound marketing and sales. The company provides tools for social media marketing, content management, web analytics, landing pages and search engine optimisation. It has integration features for salesforce.com, SugarCRM, NetSuite, Microsoft Dynamics CRM and others.
With the growth in e-commerce and explosion of data monitoring consumers’s behaviour online, companies are increasingly looking to use the data they have gathered to both attract customers and get existing customers to spend more. $HUBS has developed a leading platform that enables small and medium enterprises to do just that.
We think small and medium businesses, particularly in the US, are going to be investing in increasing their online presence and establishing e-commerce platforms, as they do they are likely to require inbound marketing support to generate a meaningful return on their investments. $HUBS is a play on the anticipated increase in penetration of inbound marketing services.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.