Investor return, not GDP key to emerging markets, says Fidelity’s Nick Price
Nick Price, manager of the Fidelity Emerging Markets and Fidelity Emerging Europe, Middle East and Africa funds, has warned investors not to confuse higher rates of GDP growth with returns on equity.
Barring an Armageddon scenario in which Chinese GDP growth falls below 5%, it is likely that emerging markets investors will continue to be enticed by economic growth trends that supersede those seen in developed markets.
Key advantages such markets have over developed ones include demographics, which, coupled to rising incomes is enabling rising consumer based discretionary spending and opportunities for companies that can target such spending.
Emerging markets in aggregate have much lower debt levels than developed markets such as the US, in Europe and Japan. Too much debt strangles growth, Price (pictured) said, which is another reason to consider emerging markets.
However, investors also need to keep an eye on P&L and balance sheets of companies. It may be all too easy for domestic companies to chase market share in growing emerging markets while at the same time forgetting the returns that owners of equity in those businesses actually want, Price said.
Taking the example of supermarkets, Price said that in some emerging markets they face significant margin squeeze because of high levels of competition even as they are committed to expanding retail space to tap into growing consumption. In other markets the margins are far better. The objective of the fund’s analysts is to track down which supermarkets are going to be in a position to produce investor returns, not which markets overall are growing fastest.
Price is also keen to tap into domestic investment opportunities, rather than buy shares in multinationals, which may do an increasing portion of their business in emerging markets. This arises in sectors such as household goods, where local subsidiaries of parents such as Unilever may offer more direct access to emerging market based returns. He also raised the example of Swiss firm Nestle; while good in what it does, still two thirds of its business is exposed to the US and Europe – both areas where it is difficult to grow market share, and both areas where discretionary consumer spending is under pressure.
Looking to subsidiaries of multinationals has other advantages; often they are subject to corporate governance requirements of their parents, which is of significant assistance to foreign investors keen to avoid the corrosive effects that poor corporate governance can have on the ability to either be treated fairly as an investors, or even indeed to repatriate returns out of certain jurisdictions.
Politics is a bedfellow of corporate governance in certain instances, Price suggests. He points to Venezuela and Argentina as not being investible on the basis of domestic politics.