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January 2017

Investment insights

The Good, the Bad and the Ugly



by Alex Duffy, Portfolio Manager Fidelity Global Emerging Markets Fund 
 
I don’t think anyone would have predicted that 2016 would be quite as eventful as it turned out to be but while a lot happened not a lot actually changed.  To my mind, investing, particularly in emerging markets (EM), always requires a patient, judicious approach and 2016 was no different. The list of issues to worry about is a long one: Exchange rates, interest rates,  growth rates, political uncertainty - my developed market peers have a lot on their plate! If nothing else 2016 reminded markets that the issues above are not just the preserve of emerging markets. Globalisation has driven ever greater linkages across geographies and asset classes, any perceived interference therefore creates volatility which is immediately transmitted across the investment universe. With that in mind, there are a couple of things I did want to comment on.
 
1) The Fund remains underweight Energy
Robust corporate governance and prudent capital allocation are two of my most important considerations when it comes to stock selection. Historically the majority of the state owned EM energy sector (which includes Russia but also China and elsewhere) have made incredibly bad capital allocation decisions. Overtime this tends to result in a significant impairment of shareholder value which is in my experience not a price worth paying for the odd period of cyclical improvement. For this reason, I continue to be discerning when it comes to stock selection focusing on minimising the risk of a permanent loss of capital before cyclical valuation expansion.  
 
2) Indian demonetisation a long-term positive
The Indian Government’s controversial decision late last year to  demonetise its 500 and 100 rupee notes to curb ‘black money’ may be an incredibly positive development long-term , given the limitations which informality imposes on the ability of an economy to continue to develop.
 
Bringing black money back into the formal banking system will, in theory, lead to a reduction in long-term funding costs and lower the cost of capital for infrastructure and investment project.  Factors badly needed in order for India to maintain the current rate of economic growth, generate jobs for its large population and avoid the inflationary pressures which fast consumer growth without a commensurate increase in fixed asset investment will create. 
 
In the short-term however such draconian measures have created sizable problems and there will likely be a significant contraction in near-term demand as the demonetisation process works its way through. The inability to transact and problems accessing cash is obvious in terms of how consumer demand and purchasing has declined since the demonetisation measures were announced.
 
Yours truly can testify to the very real impact of such measures on a recent trip to Northern India when I was forced to purchase a $3 lunch with a $30 note, only to receive my change in 10 rupee notes - all 180 of them! 
 
The demand air pocket needs to be carefully considered when looking at the valuation multiples of a number of stocks, particularly those in the consumer sector which rely on the cash economy for end demand.
 
3) Trumponomics: A little overdone
This is the most difficult topic for me as whilst one can rationalise to an extent the improvement in commodity prices, it does look overdone in light of the actual impact that the USA has on global commodity demand. Additionally, the disconnect between EM exchange rates and commodity prices is a phenomenon which typically hasn’t persisted for long in the past i.e. either EM foreign exchange will strengthen or commodity prices will pull back. In all likelihood we will see a combination of both and from this starting point it may be a little late to blanket buy resource stocks. As ever, I do think that there are some selective opportunities in this area: Grupo Mexico, African Rainbow Minerals to name a few.

 
 

References to specific securities should not be taken as recommendation.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. 

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser.

This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity Australia products before making a decision whether to acquire or hold the product.  The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au . The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. 

© 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

 

This website is intended to provide general information only and has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information and consider the relevant Product Disclosure Statement for any product named on this website before making an investment decision.

© 2017 FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340.
Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL limited.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ("Fidelity Australia"). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision retail investors should seek advice from their financial adviser. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund mentioned in this document. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. © 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, and the Fidelity International logo and F symbol are trademarks of FIL Limited.