Basa says despite short-term, macro-economic headwinds, emerging markets (EM) are on a sustained upcycle as aggressive COVID-19 vaccinations begin globally, and the market shifts its focus to reopening trade and the medium- to long-term structural growth potential not currently captured by EM valuations.
The case for emerging markets is easy to find in the numbers: 5.8 billion of the global population of 7.2 billion people live in emerging market countries, and by 2023, 80% of the world’s middle-class consumers will live outside Europe and the US. “The growth potential in these markets is massive, which makes a strong case for holding stocks in high-quality companies across these regions,” says Basa.
Basa cautions investors against abandoning core investment fundamentals in unfamiliar territories. “When heading into new markets, investors need to have a very clear philosophy, and they need to conduct rigorous due diligence.”
Here, Basa talks about three very different stocks in three very different countries that the firm is bullish about.
BIM is Turkey’s leading hard-discount retailer. Founded in 1995, it has 9,365 stores across Turkey and a further 535 in Morocco and Egypt. The group has a business model centred on minimising costs per square metre and transferring efficiency gains to customers through lower prices. Its closest South African comparison would be Shoprite.
Basa says his team feels Turkey is neglected in the emerging market sector, primarily due to political volatility. However, a bottom-up look at BIM makes it an excellent prospect. “People need to eat, no matter what is happening in the country. And this stock has delivered some of the highest returns across the emerging markets, with a ROE of 36% and a return on invested capital of 62%.”
BIM’s current valuation of 15x forward price-earnings ratio offers a huge discount to its own historical price-earnings ratio of 24x. “With a compound annual growth rate of 20% per annum for the past ten years, it is an exciting prospect to add to our fund.”
Noah is a leading independent wealth management and asset management service provider in China, with a focus on serving high-net-worth individuals. It was established in 2005 and listed on the NYSE in 2010. Noah has shown strong structural growth and its valuation is much cheaper than equivalent listed businesses in other markets, for example PSG Konsult in South Africa.
Basa says what makes this stock so attractive is the low penetration of financial assets as a percentage of household assets. Financial assets in China only account for 20% of household assets vs 72% in the USA. He expects rising fund flow into the asset management industry and believes Noah is positioned to take advantage of the rising wealth of the high-net-worth individuals as well as the rising asset allocation from non-financial assets to financial assets.
Noah is currently trading on a cheap price-earnings ratio of 12x rolling forward which is significantly lower than its historical average and other listed comparable business. Cash-rich and with massive growth potential, significant management shareholding and key shareholders like Sequoia Capital, Noah ticks Sanlam Investments’ emerging market boxes.
Genomma Lab is one of the leading pharmaceutical and personal care products companies in Mexico with an increasing international presence. It develops, sells and markets a broad range of premium brand products, many of which are leaders in their categories.
The company’s key competitive advantage is its deeply rooted understanding of the Latino consumer and the ongoing growth of its presence in key markets including Mexico, Brazil and the US. Genomma recently invested in a state-of-the-art manufacturing facility which allows the company to insource its product portfolio, increasing the quality and reliability of supply and in the process enhancing profitability.
Genomma Lab is expected to increase earnings at a compound annual growth rate of 23% in the next three years, buoyed by ongoing production innovation, the development of new categories, a new production plant and reconfiguration of the US business. The company currently trades on a forward multiple of 12x its earnings. This is inexpensive in the context of the expected EPS growth for coming years.
The R2.3-billion Sanlam Investments Global Emerging Markets Fund has Alibaba and Noah Holdings in China, Samsung Electronics in South Korea and Genomma Lab in Mexico among its top 10 holdings.
For more detail, view the Sanlam Investments Global Emerging Markets Fund fact sheet.
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