I have been a fan of emerging markets for the entire 27 years I have been in the industry. I even started a savings plan for my son in 1990 when he was born and I am glad to see Aberdeen emerging markets has not let him down over this time. So I am grateful to the likes of Hugh Young, head of the emerging markets team at Aberdeen, and Devan Kaloo, the lead manager of the fund who I recently caught up with for an update.
Rather than looking at the wider economic picture, the Aberdeen team places far more emphasis on analysing individual companies with a focus on finding good quality firms. You might think all fund managers do that but that is not always the case. The Aberdeen team closely scrutinises the management of the company and ensures any firm it invests in has a balance sheet it fully understands. It also looks for a business with an edge over the competition and whose earnings should be resilient through a complete economic cycle.
This style is often characterised as being very defensive but Devan is keen to dispel this. He believes Aberdeen is conservative in what it buys but quite aggressive on how that that money is allocated. When the market rallied strongly from its low point in 2008, the team was not invested in defensive shares but in industrial companies that would benefit from economic recovery. These had suffered sharp share price falls in many cases but the Aberdeen team felt they would survive and eventually prosper, although it could not be sure of the timescale.
When I asked Devan where the team was finding the best value at the moment, he said he was something of a reluctant buyer at present, feeling many markets are not particularly cheap. Neither does he consider them expensive but he would like to see a correction in order to buy into stocks at lower levels. Whether we will see one is a moot point and any downturn could be short-lived with the amount of money flowing into this area.
In contrast to many countries in the West, emerging markets are generally in good economic health and an increasingly attractive proposition for investors around the world. Notably, lending activity is growing and local consumer demand is strong, unburdened by high levels of debt.
Areas where Devan is seeing particular value include Mexico, Turkey and Thailand. The team is finding opportunities such as Akbank in Turkey, a well-capitalised and conservative bank with a leading marketshare, and Siam Cement, Thailand’s largest cement producer, which has a strong balance sheet and an attractive yield.
Another region Devan is keen on is the subject of last week’s column, India. The country is less dependent on exports than most other emerging markets and although valuations appear high, earnings’ growth is very strong. He also believes corporate governance is good among the major stocks, in contrast to other emerging markets such as Russia, where he is far more nervous. Here he feels there is a distinct lack of transparency in energy stocks and areas that are more attractive, such as consumer stocks, are expensive.
The Aberdeen emerging markets team is one of the most experienced and disciplined you will find. Its long-term approach and low level of trading activity appeals to me and I am as keen on the fund now as I was back in 1990.
Whether you are seeking a fund to form the core of your emerging market exposure or simply looking to make your first equity-based investment, this is worthy of consideration. If you are already a holder then I suggest you look to top up, particularly if there is a market correction. With so much money going into emerging markets, I suspect we will not see much of one.
Mark Dampier is head of research at Hargreaves Lansdown