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Top EM Fund Manager Says: Go Long Russia for 2021
Broader Emerging Markets Will Be Lifted by Weak Dollar, Strong Structural Story
You can’t turn on Bloomberg or CNBC these days without someone telling you to go overweight emerging markets. Buy South Korea! Look for the great Indian consumer recovery! Don’t count out China tech! Brazil is back!
Here’s just a partial list of major players saying that your 2021 portfolio needs an emerging markets boost
Investors have been heeding the call. According to the Institute for International Finance, net inflows into emerging market stocks and bonds hit a seven year high of nearly $30 billion last month -- though it was playing catch-up from Covid-related outflows.
Amid this EM bullishness, I spoke to Malcolm Dorson, senior portfolio manager for the Mirae Asset Emerging Markets Great Consumer Fund and followed up with an email exchange. According to their own fact sheet, they are looking to invest in “the long-term and sustainable megatrend in emerging markets created by the newfound purchasing power of the rising middle class.” Their top ten holdings include some of the more familiar EM equities plays like Tencent Holdings, JD.com, and Samsung, and concentrate on China, India, and South Korea. According to Bloomberg, the $1.2 billion fund has delivered better returns than 91% of its peers over the last three years.
Here’s what he had to say
Dorson’s Take: Powerful Structural EM Story, Weak Dollar, and Buy Russia
“We see powerful structural opportunities as EM economies shift away from asset heavy low return industries -- manufacturing, construction, commodities -- and towards services, innovation, and high return business models. This shift creates higher paying jobs and increases discretionary income, which should lead to higher standards of living and a shift in spending patterns to healthcare, education, luxury, travel, experiences and more. More spending in these areas amplifies said shift and, ultimately, translates into a domestic, consumer-driven self-fulfilling cycle.”
He also said that China remains “the most powerful structural story in the world as it moves from manufacturing to innovation to services,” and its “first in, first out on Covid,” bodes well for the economy in 2021,
As you look at emerging markets, he notes, keep your eye on the dollar. He thinks the persistence of a weaker dollar will benefit EM broadly over the year.
“EM equities move up about 4% for every 1% move down in the dollar. There’s also a dollar inverse relationship with commodity prices. When the dollar weakens, commodity prices go up, which should benefit several key emerging markets like Brazil or Russia.”
He sees US stimulus spending over the past year creating a deeper fiscal deficit and putting pressure on the dollar. “The combination of an outlook for more government spending combined with dovish monetary policy and a low growth environment should weaken the currency further.”
What if the Dollar Strengthens?
Here’s what he had to say:
“If the USD stays where it is, there are still significant tailwinds for EM in the form of low penetration rates, attractive demographics, tech-focused catch-up opportunities, and low hanging fruit in the form of economic and political reforms. In the event of a stronger USD, the asset class would face a headwind. Here it is vital to stay selective and make sure to avoid over leveraged companies, countries and corporates with significant USD debt, and cyclical sectors. In this event, we believe Asia would outperform Latin America and EEMEA (Emerging Europe, Middle East, and Africa). On a country basis, we think China, the UAE, Saudi Arabia, Korea, Mexico, and Taiwan could still perform well in this environment. From a sector perspective, you'd want to avoid commodities and favor technology, communication services, and healthcare.
Buy Russia, Dorson Says
He is particularly bullish on Russia for 2021. “Even if targeted actions against Russia come from the Biden administration, the fundamentals are attractive,” he said. "Targeted actions from the Biden administration would remove the overhanging fear of broad sanctions against the entire economy and allow investors to once again focus on fundamentals - which at this point look very attractive."
Here’s his Russia case and some of his top stock picks
“Average debt to equity levels are below 20%. That means these balance sheets are not only conservative, but also inefficient. This creates an opportunity for corporates to increase dividends and buybacks and also decrease their average cost of capital."
So, what companies does he like in Russia? Yandex (YNDX), Tinkon Holdings (TCS), Detsky Mir (DSKY) and Ozon. He also notes: “I have to disclose that we own these names (YNDX, TCS, and DSKY across various funds and Ozon in our Russia fund).”
Dorson’s Top Russia Picks
He sent me some follow-up information on each of these companies he picked.
“Yandex is the dominant internet search engine in Russia that also holds leadership positions in other fast-growing, technologically driven verticals including Taxi (via a JV with Uber), classifieds, media services, and a constantly changing group of experiments. The Company is also a world leader in self-driving car technology, which could be a material game-changer for their growth, particularly when combined with their existing fleet management, food delivery, and taxi businesses in a potential future car focused super-app. Over the medium/long term they should also benefit from a growing position in servers for cloud computing.”
Ozon holdings - the #2 ecommerce player in Russia
“Russia has a fragmented and fast-growing e-commerce market and Ozon’s market share could increase five-fold within the next five years - via building out its already substantial logistics and fulfilment infrastructure, a key competitive advantage. E-commerce only represents roughly 9% share of total retail in Russia and should grow at significantly over the next 5 years.”
“TCS Group is Russia's leading 100% digital bank. The Company, through its subsidiaries, offers an online retail financial services via a branchless platform. Leveraging its high-tech proprietary online platform, TCS has no branches. TCS Group presents an opportunity to invest in an innovative high-tech business model levered to the underpenetrated Russian consumer (note mortgage penetration in Russia stands at roughly 6%). Management’s compensation scheme creates a strong alignment with minority shareholders, liquidity has improved, and TCS has now built a strong track-record outside of credit, showing their ability to continue to grow, monetize, and diversify their business. The bank is also well capitalized, extremely profitable, and focused on reinvestment – which will allow it to continue taking share from smaller and less sophisticated peers.”
“Detsky Mir Group is the largest children's goods retailer in Russia and the CIS. As the largest domestic player, the company has significant pricing advantage versus competitors given their economies of scale. Furthermore, Detsky Mir operates an asset-lite model (driving high ROIC) and is extremely cash generative, which supports their aggressive store roll-out and digital/e-commerce plans. Finally, Detsky Mir is poised to benefit from a recovery in the domestic Russian consumer environment.”