Nigerian Breweries, a subsidiary of Heineken, is another favoured stock in the consumer area. While this trend also extends to China, Livingston says competition is much greater than in Africa, meaning companies are often chasing revenue growth and have to sacrifice profit margins to achieve it.
Looking at other sectors, materials has been key for portfolio performance, with Price timing his moves in and out of areas like iron ore, steel and energy well based on global conditions.
At present, the fund is broadly underweight materials, with Livingston noting the unsustainable 50% contribution of investment (property, infrastructure and so on) to Chinese GDP. “This level is clearly not sustainable, which will mean a deceleration in building projects and therefore demand for commodities such as copper, iron ore and steel,” he adds. “We have held some gold miners in the fund but these proved detrimental as the companies have continued to underperform the underlying metal price.”
Looking over the years, Price moved out of materials and markets like Russia prior to the credit crunch, concerned that spiraling gasoline prices would feed through to lower demand for oil. He subsequently moved back in when Chinese stimulus measures brought global energy demand back and has since trimmed materials again to favour the growing consumerism theme.
Elsewhere in the fund, IT is an overweight position, with Livingston highlighting attractive valuations and economies of scale in names such as Samsung Electronics. “Smartphone adoption is a secular theme in place across the fund, with positions in stocks like AAC Technologies – which makes the earpieces for iPhones – giving us a place on the supply chain,” he adds. “We also own Chinese internet companies such as Tencent and Baidu, with huge underpenetration relative to the West, plus Naspers in South Africa, which owns a stake in Tencent.”
Moving on to financials, Livingston says the sector has too many individual dynamics at play to be seen as an individual entity, with no single dominating external force like the oil or gold price. Overall, the portfolio is light in this area, with nothing in the large Chinese banking sector on concerns about the levels of state debt yet to be included on balance sheets.
Livingston also draws attention to banks in areas like Poland – where the sector dominates the local market – which issued mortgages in Swiss francs pre-credit crunch and are suffering as the currency has soared as a safe haven. Looking at the macro picture, China obviously remains the key but there remain concerns about the accuracy of economic data. “People continue to argue about hard or soft landings but China is clearly slowing down to some extent, with consumption not enough to make up for declining investment spend,” adds Livingston. “Wage growth has also been rising for several years and China is becoming less competitive in the export space but the key will be when the country can generate more wealth from within. We may not see a return to double-digit GDP growth but a China driven by secular rather than cyclical factors will eventually emerge a much stronger proposition.”
With such a spread of countries within GEM, Livingston feels it is hard to comment on broad equity valuations – although he believes these markets should still trade at a discount to the developed world. “Western markets may not have the economic growth, but they still have the advantage when it comes to corporate governance,” he adds. “GEMs currently trade at around a 20% discount to developed equities and we see this as about fair considering global economic growth remains slow.
Looking around the region, EMEA remains the cheapest, particularly Russia – which remains on a significant discount to its own history – while areas like China and Brazil are on decent valuations. Apart from companies like Shoprite, Africa is also largely unappreciated and remains at the cheaper end.”
At present, the pressing question for Price and team is whether another rotation into materials may be sensible, with quality stocks in the consumer area now at a premium and more cyclical names looking cheap. “We have moved into materials in the past and may do so again but with a quality focus, we will tend to underperform during sharp bounces, with several commodity names with bust balance sheets rallying hardest post-America’s recent QE3 announcement,” adds Livingston. “We would always focus on less risky return on equity stocks and any shift into commodities would be into higher-quality names. “Broadly speaking, we feel the next few years will highlight the benefits of active management within emerging markets, with the free lunch period of 2003-2007 very much a thing of the past.”
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