By John Malloy
Identifying the right opportunities within both developed emerging markets and less established regions for the more index-agnostic investor can lead investors off the beaten track. Countries where good opportunities might not be obvious – China, Mexico, Thailand and Pakistan – can offer some of the more compelling investment cases.
China
Despite the general fear that China property is crashing; the bottom-up demand for housing is more resilient because of the still low urbanisation rate at 55% and pent-up upgrading demand as the relatively better quality commodity housing market only exists for less than 20 years. Through August total contract sales grew 7% y/y in volume and prices have increased 8% y/y, with tier-1 cities experiencing a 20% increase in prices.
China Vanke, one of the largest developers, is taking advantage of the growth. So far Vanke’s contract sales have grown 20% y/y. With low leverage and small land back, they are able to produce a strong return on equity over the past three years of almost 18-20%. Yet, the valuation is cheap at 7x forward earnings and trading at a 40% discount to net asset value. With a $10bn repurchase plan in place, management who are large shareholders clearly have a strong view on the recovering real estate market in China.
Mexico
Macroeconomic policies and policy frameworks in Mexico are among the best within emerging markets.
Significant reforms have been implemented in energy, telecommunications, anti-trust, labour markets, education and the financial sectors. These reforms will enhance competition, improve labour market flexibility and encourage investment, paving the way for greater productivity and potential output over the medium term.
High frequency data on economic activity is showing stronger signs of momentum following a period of relatively choppy data, as Mexico will be among the greatest beneficiaries of the US manufacturing recovery. Most importantly, Mexico has world class companies, such as Cemex, dominating the cement market in Mexico, US, EU, Egypt and Philippines – clearly a global winner.
Thailand
Thailand has been in the news these past few years whether it be political protests, military coups and, recently, a terrorist bombing. Who would have thought that Thailand has a robust tourism industry?
After going through a patchy 2014 due to political uncertainties and weakness in Europe, Thailand received almost 18mn visitors this year, up 31% compared to same period 2014. Chinese visitors are up 113% through July. The tragic August bombing at Erawan Shrine in Bangkok could have derailed the tourism recovery, but initial feedback suggests that volume growth still remains in positive territory.
The $35bn tourism industry in Thailand indirectly impacts 20% of GDP and 15% of employment. Minor International with 134 hotels and 17,075 rooms has a leading position in Thailand hospitality sector but also operates in the Middle East and Africa. As a direct beneficiary of the tourism recovery, the company has seen its Bangkok revenue per available room up by about 60% in first half of 2015, despite the peak season being usually in the 4th quarter.
Pakistan
China’s One Belt, One Road is driving Pakistan in the right direction. The China-Pakistan Economic Corridor is a massive project of railways, ports, motorways and energy infrastructure projects across Pakistan. The total value is estimated at $46bn, which is twice the FDI amount received by Pakistan since 2008. Most of the projects are due to be completed within three years and the economic benefits to Pakistan will be significant given that infrastructure bottlenecks have been a major constraint on potential GDP.
Pakistan has also done very well under an IMF program reducing the government’s budget deficit, building foreign exchange reserves and achieving stable GDP growth while maintaining low inflation and accelerating privatization. With the improving macros, peace dividend, Chinese support, and large population, Pakistan equity investment remains attractive especially with the banking, consumer and construction industries.
We believe an active index agnostic approach will continue to help create alpha for investors over the years ahead.
John M. Malloy is an emerging markets equities portfolio manager at RWC
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