Comgest sees pockets of growth in emerging markets
Wojciech Stanislawski, Comgest Growth Emerging Markets portfolio manager comments on the growth potential of emerging markets.
In a world dominated by abundant liquidity, zero percent interest rates and increasingly desperate and irresponsible central banks, it may be that 2015 will be a year of relative investing. In this context, emerging markets is worth considering.
It must be noted, however, that the environment in emerging markets remains tough, with many economies showing limited progress on making the necessary structural adjustments required to deal with a low-growth global economic backdrop and the drying out of USD liquidity. Some may view the emerging markets currency weakness as a precursor for bigger problems to come, i.e. a liquidity trap in the emerging market bond market, which would push up borrowing costs in emerging markets dramatically. However, recent positive earnings revisions across the large equity markets of India and China suggest a possible silver lining for fundamental trends.
While emerging markets will probably continue on the path of gradual adjustment, consensus expectations for growth in emerging market have turned meaningfully lower and are now more in sync with reality: sluggish growth. This is good news as a very negative, unexpected growth surprise has therefore diminished.
In 2015 9.8% EPS growth is expected by the consensus for the MSCI EM. This may prove challenging following four years of significant pressure on EPS growth expectations. In particular the collapse of the oil price will be a burden for earnings growth of an index strongly exposed to the energy and materials sectors. Only the Asia ex Japan region, being a net oil importer, will tend to benefit via improving terms of trade. EPS growth over the last three years for the MSCI EM has been disappointing at 4.2% p.a. on average. However, the Comgest Growth Emerging Markets portfolio delivered double-digit EPS growth over the same period of 11.9% (as per November 30, 2014). We hope that the earnings resilience of our quality growth style can once again make the difference in a year, that we expect to be rich in challenges.
Portfolio addition: Bharti Infratel
We have recently made a promising addition to the portfolio with Bharti Infratel, India’s largest operator of telecommunication towers. Bharti Infratel benefits from the very rapid growth of data consumption in India reinforced by the nascent smartphone market. Bharti Infratel will most probably see notable increases in its tenancy ratios, i.e. number of transmitters per tower, which naturally is very good for margins in this business with high operating leverage. In addition, the company is beginning to add new towers further boosting growth. With the average contract term spanning a seven year period, we have high visibility on the existing business yet we feel this is not reflected in its current valuation. Bharti Infratel is likely to face several years of strong growth of which the market is not yet fully discounting.