Petrobras certainly has a lot to answer for. When a country’s economy is so dependent on road transport, its largest diesel manufacturer forces up prices to the point more than 200,000 enraged truckers around the nation take strike action, and its population is so politically disenchanted it stands firm with the strikers bringing its country to a standstill. That the CEO of said manufacturer quit is little surprise.
What may surprise then is why the team behind the Newton Global Emerging Markets strategy has dipped a toe into Brazilian waters for the first time since 2014.
Emerging market currencies are typically the worst victims of a strengthening dollar and the Brazilian real has dropped off more than 10% in the past three months. Notwithstanding the looming threat of a global trade war, the country has issues, undoubtedly.
While the team has held an underweight to the Brazilian market since 2014, which has helped performance as sentiment weakened, what the trucker’s strike did was return focus to the considerable uncertainty that exists around how Brazil’s next government may look after its elections in October. And all this comes against the backdrop of a very wide fiscal deficit on which action still needs to be taken.
It should be remembered that the vast majority of long-term fund returns are generated by stock selection. Whilst macro informs the team of the environment for their stock-picking and will have an important impact on company assumptions, it can be possible to find excellent, long-term valuegenerating companies in challenged countries, and vice-versa. Therefore, where the team are unable to find any such investments that meet their high standards, their positioning in a country can look significantly different to the benchmark, and cause, hopefully short periods of performance drag for that reason as was seen with the Brazil political rally in 2016, that was not based on fundamental.
With this in mind, Newton’s emerging markets team have recently identified a highly attractive stock in Brazil, and do see some economic green-shoot and potential for longer-term political improvement. During 1H18, the strategy has taken a c.1% position in travel and tourism provider CVC Brasil Operadora Agencia, which as well as having a stand-out financial profile is very well exposed to the structural growth in travel as a trend. This one holding is still significantly underweight the benchmark’s 5%, but signals a whisper of optimism towards the country, in spite of all its woes.
While broad composition of the strategy over the quarter has remained more or less constant – some fine-tuning of the strategy has meant reducing the number of holdings down to just 45 (it was around 60 a year ago and 70 two years ago). This has been achieved via trimming the smaller positions held.
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In the ‘tail’, which tended to be lower conviction or lower liquidity, giving room to focus more where the managers see higher favourable asymmetry of expected returns vs. risk outcomes.
The strategy now sits at over £1bn, so a tighter focus can make sense, with the GEM team positioned for an outlook that relies on supportive demographics, technological innovation and government reform.
India’s ongoing structural reform
While the strategy has been tightened-up, there are still many strong new ideas and a number of new stocks entering the portfolio. One such is Indian home loan operator Housing Development Finance Limited.
Naomi Waistell, portfolio manager says: “The company will give us exposure to structural growth in the Indian home loan segment, at what we perceived to be an attractive level relative to the stock’s history.”
HDFC Ltd. is just the latest example of what the team see as a promising Indian financial company, building on the story already being expressed in the strategy through companies like Edelweiss.
This Indian lender is exposed to the rise of consumer credit demand across the country, while being primed for rising interest rates.
“Non-bank financials in India are an area we particularly like. There are attractive trends in its landscape when compared to banks, which are very much in state hands,” says Waistell.
“A brokerage business historically, Edelweiss’s management saw the opportunity to get involved in niche areas outside the banking arena, of selective distressed assets. However, the bulk of its business is in lending and, increasingly, insurance.”
She explains how these areas of financial services are generally deemed “high return”, with sectors such as insurance underwriting ripe for long-term scalability, given the structural trends exemplifying the changing Indian landscape.
Waistell describes these as: the “financialisation” of assets; the democratisation of credit; privatisation of the financial sector – with power moving away from the state; a shift from bank to non-bank services; and the localisation of financial services.
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