Fidelity: Be Selective In Emerging Markets, Upside for India, Mexico, Africa?
January 5, 2015
It’s not the best of times for emerging market economies, given the downdraft in commodity prices, but the market isn’t properly valuing high-quality stocks with strong cash flows, says Fidelity Investments.
On Monday, emerging markets were not immune to the selloff blamed on the lower price of crude oil. Greece was the worst performer Monday, but oil exporters Russia, Brazil and Mexico also were in the red. Shares of Brazil’s state-controlled refiner and oil producer Petrobras(PBR) and the National Bank of Greece (NBG) fell about 10% apiece, and Sberbank Rossia(SBRCY) was down 3.6%. The Vanguard FTSE Emerging Market ETF (VWO) fell 1.6% Monday.
In a report released January 2, Fidelity portfolio managers Sammy Simnegar and John Carlson, as well asDirk Hofschire in Fidelity research, write that the emerging-market government debt market opportunities “may become more selective in the year ahead.”
Simnegar is a manager on several Fidelity funds, including the Fidelity Advisor Emerging Markets fund (FAEMX), a bond strategy with a heavy concentration in sovereign debt, and the Fidelity Emerging Markets Fund (FEMKX).
As for developing-country stocks:
“Another question for 2015 will be whether emerging-market equities can break a four-year streak of underperformance. On the plus side, emerging-market valuations are cheap, which suggests a lot of the bad news has already been priced in,” says Jurrien Timmer, director of global macro for Fidelity.
In Fidelity’s emerging market equity outlook for 2015, Simnegar writes that he expects ”significant return dispersion among emerging markets, in contrast to the last cycle.”
“Emerging countries positioned to benefit from structural reforms, such as India, Indonesia, and the Philippines, may be among the performance leaders in 2015. By contrast, countries that still need to undertake these structural reforms, including Brazil, Russia and China, may struggle. Middle-class growth in emerging markets is fueling numerous opportunities in both developed- and developing-market stocks. China now has a greater number of households with disposable income of more than $10,000 than does the United States; India has more such households than does Japan … On the whole, I have a positive outlook for markets in India, Indonesia, the Philippines, Mexico, and Africa, which have above-average growth rates and moderate inflation.
On the other hand, I have a more negative outlook for Russia, Turkey, South Africa, and Brazil, which have low-single-digit GDP growth and mid- to high-single-digit inflation. As far as China goes, while I don’t believe we’ll see a systemic crisis, I expect mid-single-digit GDP growth and a gradual shift from fixed-asset investment to consumption-led GDP growth.
From a sector perspective, my investment approach favors the “three Bs”—companies that benefit from barriers to entry, top brands, and best-in-class growth—which tend to be overrepresented in the consumer staples, consumer discretionary, and industrials sectors, and underrepresented in commodity-dependent sectors such as energy, materials, and utilities.”
Top holdings in the Fidelity Emerging Markets Fund include Samsung Electronics(oo5930.Korea), Taiwan Semiconductor Manufacturing (TSM) and Tencent Holdings(TCEHY). In the energy sector, holdings include the Turkish refiner Turkiye Petrol Rafinerileri(TUPRS.Turkey). Among the fund’s top-25 holdings is a UK-listed diamond mining company,Petra Diamonds (PDL.London and PDMDF), that trades over the counter in the U.S.