In this series, Investment Week speaks to some of the winners of the Fund Manager of the Year Awards 2020 about their teams, how they construct portfolios, performance drivers and how their particular strategies may develop in the future.
How are you tackling the challenges facing emerging market investors in the current climate as a result of the fallout from the crisis?
The spread of Covid-19 seems under better control in key markets such as mainland China, South Korea and Taiwan. We would also highlight that the EM equity market's dependence on oil and gas, and materials has come down remarkably over the past decade and has converged close to that seen in developed markets.
For example, in 2007, these sectors accounted for more than 30% of the MSCI EM index compared to less than 12% today. Growth is set to hold up better in major emerging market economies versus developed markets.
While we do not expect markets to head straight up from here, the next few months should provide a window for increasing exposure to a fund composed of long-term compounders.
We are valuing companies under the assumption of a rebound in activity in 2021, something we may need to monitor/reconsider if we need to look further out for the recovery.
Markets are looking like they are beginning to discount the phase 2 of the virus and a realisation that this virus will not go away.
As mentioned previously our focus remains on long-term, structural drivers of growth: the rollout of 5G networks, greater digitisation and applications of the internet of things, rising financial penetration, healthcare and infrastructure development and growing consumer appetite for premium products.
We favour quality operating companies in these fields amid the ongoing economic uncertainty, weak commodity markets and potential credit-quality issues.
Where do you see the big opportunities for emerging market investors in the years ahead?
The team thinks that in the medium to long term, several shifts are likely to happen to global supply chains, travel and tourism flows, use of technology and household behaviour.
The winners will likely be emerging manufacturing hubs (we believe Vietnam and Mexico will benefit as manufacturers de-risk their supply chains from disruption) and regional tourism (with Macau probably emerging as a favoured destination for the Chinese).
Healthcare will be another, as governments throughout the world are likely to boost spending on healthcare to fill the gaps in their preparedness, as well as technology (as a driver to boost productivity and growth) and online sectors, which will benefit from a faster shift from offline to online in areas like entertainment, commerce, food delivery, and education. This is where our investment focus lies.
The corporate landscape that evolves after the Covid-19 pandemic will be different to what came before. Amid the economic damage, there will be innovation and progress, and many businesses will become stronger as a result.
We believe the emerging market, structural growth story remains intact, driven by an aspiring, growing middle class, rising digitisation, reforms and infrastructure development.
As industries consolidate, companies with strong balance sheets and capabilities will benefit from these structural drivers.
Overall, we view the current environment not as a threat, but as an opportunity to increase our exposure to excellent, quality companies that are now available at discounted prices.
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results.
The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.
Issued and approved by Hermes Investment Management Limited ("HIML") which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is a registered investment adviser with the United States Securities and Exchange Commission ("SEC").