Emerging Market opportunities ex-China and India according to Aubrey

Rob Brewis, fund manager at Aubrey Capital Management, 20/04/2022

When the Aubrey GEM strategy was conceived in 2012 over 50 percent of the portfolio was invested in Asia, out with China and India. There have been long periods since when this portion has dropped to well below 10 percent.

These changes are predominantly driven bottom up by the companies we find which meet our exacting requirements, namely the “three 15s”: at least a 15 percent ROE, Cashflow Return on Assets and EPS Growth. Between 2012 to 2014, for example, the Philippines experienced a strong investment cycle and a rare period of above trend economic growth.

As a result, it was throwing off several investment opportunities as consumption growth soared. Subsequently, this cycle tailed off and, in tandem with neighbours like Thailand and Indonesia, much of the consumption growth was sucked away from those more traditional consumer companies, into the e-commerce and online world. As a result, there have been few candidates in these countries with sufficient growth and returns.

Throughout this period China, experiencing its coming of age, in consumption terms at least, has provided a good hunting ground for stocks, while the Indian opportunity goes from strength to strength, as previously covered. But as China wrestles with the latest covid troubles, the rest of Asia, like much of the world, is emerging from its grip and with that has come the prospect of better growth and some interesting opportunities, oil prices and the like notwithstanding. Thailand has had phenomenal success in the last decade as a tourist destination, but this has become something of a millstone during an era of travel restrictions.

Recovery is coming, although it may take time for the largest cohort of traveller, the Chinese, to be let loose again. In the meantime, a smaller subset of the travel trend, medical tourism, is returning faster. Much of the clientele are middle eastern, where incomes are likely to be buoyed by current oil and gas prices.

The super-rich may still make for Europe and the US for a new heart or kidney, but there are many more who will travel to Bangkok, and Bumrungrad Hospitals in particular, for similarly high-quality treatment at a substantial discount. Further south, Indonesia has, for the moment at least, a rewarding combination of an appealingly large, young population of consumers, as well as abundance of some of the commodities we all seem to be struggling to find elsewhere.

While our exposure has hitherto been through Sea Ltd, one of the companies we have added is the leading consumer finance franchise. We have owned Bank Rakyat before and it is now again in a strong position to take advantage of this more traditional recovery. Small lenders were hit hard by lock downs, and are now getting back on track, while with lending rates edging up, margins are likely to be very healthy. We expect growth to exceed expectations, and valuations are compelling. Vietnam is an economy which has proved resilient throughout the last few years of turmoil.

On balance, the government has charted a sensible course through covid, and it remains an attractive non-China destination for manufacturing dollars. Accessing the right stocks has and remains a challenge, but less so than in the past. It has now been possible for us to buy a couple of stocks. One of these, retailer Mobile World, remains the most attractive consumer stock in Vietnam and we added it to the portfolio without overpaying. In fact, valuations are still very attractive for a company with such a long runway of growth ahead, and such a strong position. The above together with a couple of positions in Korea and one in Taiwan have provided the opportunity to diversify from China (and exit LATAM) while still satisfying our challenging valuation metrics. They join our longstanding holding in Polish supermarket, Dino Polska, which, by the way, continues to perform admirably.

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