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TT Emerging Markets coronavirus update

WorldWatch
28 February 2020

We outline what action our Emerging Markets strategies have been taking in light of the coronavirus.  

This week has seen sharp falls in equity markets as coronavirus concerns have caused both economists and companies to warn of slowing growth rates.  Many global strategists have downgraded their expectations for global earnings growth from +4/6% to nearer zero for this year.

As clients will be aware, TT’s Emerging Markets and Asian teams were pro-active in cutting the most at risk Chinese names in mid-January. The two most obvious losers in the portfolio were Chinese travel agent Trip.com and Macau casino operator Melco. With these sales, so the aggregate Chinese exposure in these funds was also cut. Partly as a result of this action, from the start of the year to Thursday 27th Feb, the core EM strategy is 99bps ahead of its benchmark and the EM Unconstrained strategy is 146bps ahead. 

The first sharp fall in equity markets came on January 27th.  Having Chinese names listed on foreign markets was also helpful in this regard as the timing of the Lunar new year meant that the local markets were closed.  This market holiday gave the team time in which to review all the names held, and also those on the watch list, in order to consider which might be beneficiaries of the virus, and therefore be opportunities to accumulate on weakness.

By the time the Chinese exchanges re-opened on February 3rd, the team were selectively buying.  Examples include Yonghui Superstores, which has a strong position in fresh produce sold through local stores in China.  It has seen sales improve as people have not wanted to travel to out of town stores, and have avoided the traditional ‘wet markets’, where the virus is thought to have originated.  Indeed, provisional same store sales were released this week for the first two months of the year and showed in excess of 20% year-on-year growth.  Another beneficiary added to the portfolio is Lepu Medical, which does medical testing (including for the coronavirus).  To fund these buys, some profits have been taken from Technology names that have held up relatively well, including Alibaba.   

Geographic positioning has changed relatively little over the past few weeks.  The core EM strategy has a modest underweighting to China, with India still the largest overweight.  Other notable overweights are Russia, Korea and Brazil.  The largest underweights are Taiwan, Saudi Arabia, Thailand and Indonesia.

In terms of outlook, with the initial focus of coronavirus being on China, it is interesting that Developed Markets have taken fright this week as it has spread globally (most notably to Italy, Iran and Japan).  Chinese equities are, paradoxically, less vulnerable in our view, and the authorities are more likely to stimulate the economy through further monetary and fiscal easing.  It is also interesting to us that the weakest EM markets have been the ASEAN markets of Thailand, Philippines and Indonesia. 

Whilst we have been selectively adding to China over the last few weeks, we continue to have a portfolio beta of approximately 1. Although we continue to look for oversold opportunities in current market volatility, we are mindful that a protraction of infections into Q2 may have a material effect on global growth and supply chains. We will therefore remain vigilant and conservative in portfolio construction. 

With multiple inefficiencies inherent in Emerging Markets, we continue to search for individual names or countries which offer exciting opportunities.  At the market level, we note that four markets which we are underweight - South Africa, Indonesia, Philippines and Malaysia – are now 1 standard deviation cheap on price/book and P/E metrics over a 10-year time frame, and may offer some opportunities.  Similarly, Thailand has also been very aggressively sold off and warrants some consideration.  Expensive markets on this basis are Taiwan and Brazil.  The latter we remain overweight, but have been reducing as valuations get harder to justify. It is also interesting to note that some EM currencies are coming under pressure of late, despite the fact that current account positions are, in many cases, substantially improved relative to historical comparisons. This might provide opportunities for us to search for exporters in those markets.  

Guangdong Tapia and Guangzou R&F have been two major sources of cash this week.  The former has been a beneficiary of an expected boost in Chinese infrastructure spending, and has therefore held up well; and the latter is a higher beta name and therefore the position has been reduced on the grounds of conservatism.  We have also used LG Corp and LG Chem as sources of cash in Korea, and continued taking some profits from Alibaba.  In addition to adding further to Lepu Medical, other notable purchases this week have been Russian search and new economy name, Yandex, and South African financial services group, ABSA.  The latter enables us to cut our underweighting in South Africa as the government tackles their economic headwinds, and is a beneficiary of monetary easing.  Yandex is a structural growth name that we have owned before and have always liked.  With weaker markets, this is a stock which we can now justify owning with approximately 25% expected upside.  Its business lines are performing well and it is relatively defensive, with net cash on the balance sheet.  

Important Information: 

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT International Asset Management Ltd. is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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