Call volatility's bluff with these three stocks

Call volatility's bluff with these three stocks

This article first appeared in Livewire markets on 3 April 2023

In a market full of buzzwords and buzz-acronyms (Buy The Dip, There Is No Alternative, etc), "deglobalisation" does not get nearly as much airtime. But after the COVID-19 pandemic, the Russian invasion of Ukraine, and the ongoing split on tackling climate change, deglobalisation has become a real issue that investors need to contend with. Nowhere is this more true than in the emerging markets space, especially because no two emerging economies are alike.

While this all plays out, volatility will remain a fundamental part of investing - especially in emerging economies. But Amit Goel of Fidelity International argues that volatility can also be your best friend if you know how to manage the topsy-turvy nature of financial markets.

"We are always interested in the best quality businesses - ones we can understand. That means whenever these can be presented at right prices, we are able to take that volatility."

In this edition of Expert Insights, Goel shares his thoughts on volatility management and deglobalisation's impact on emerging markets. And, to prove he knows where and how to find those great opportunities, he shares three major holdings in the Fidelity Emerging Markets Fund that fit their criteria.

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LW: How do you deal with the volatility that is a natural feature of emerging markets?

Goel: We believe that volatility is always an opportunity for us. It all goes to the basics that if you understand something, if you understand a business, if you understand people behind the business, if you understand the long-term earning power of that business, you are able to value that business in medium to long term becomes higher and higher. And if you can value any asset class, volatility becomes your friend.

With volatility, the market presents you opportunities to buy that asset class or that stock at discounted prices. And that's where we believe that volatility is always good for our asset class and our philosophy. When it comes about what kind of volatility we are able to take, we would never go into stocks which are very average businesses.
And because of the volatility, they're trading at very cheap prices and we are just trying to play a cyclical trade of them going back to some average valuations.

We are always interested in the best quality businesses. We are always buying businesses that we understand, which means that whenever they are presented to us at right prices or below their intrinsic value because of the volatility, we are able to take that volatility. But we will never take a volatility where there is a business that we don't understand, or business which is very average and just cyclical business and we are just playing a cyclical trade.

LW: How will emerging markets be affected by deglobalisation?

Goel: I think de-globalisation is a structural theme, but in my view it's a very gradual theme as well. China still remains a very large part of global trade. We are talking about China being about 20% of global trade, and it's a humongous part of any global supply chain. Anything which you and I use on a daily basis would find its supply chain or some part of its supply chain coming out of China.

But there are places outside China which are now getting benefited by this de-globalisation trend. I think this trade war between the West and China will continue, will lead to more and more de-globalisation. But companies are normally very capitalist in nature as well. So, they need to see monetary benefit of these de-globalisation. And there are places outside China, like India, Mexico, Southeast Asia, which are getting benefit of this, but they need to create the right ecosystem to help from that de globalisation.

So, I think again, it goes back to basics. We look sector-by-sector. There are some sectors like chemicals where we see a lot of movement out of China into India. It's a very large global industry. China is 70% of the global building blocks of chemicals and pharmaceuticals, and we see Indian companies putting a lot of CAPEX on the ground now to benefit from this de-globalisation where customers are looking to diversify supply chain.

In areas like auto components, where again, China is a large part of global supply chain, but in places like Mexico, we see new plants coming up in that place. I was talking to our Mexican analyst and she was explaining me that the number of near-shoring opportunities in last 12 months have been highest in the last 10 years. So, we clearly see movements, but these are very specific to sectors and industries. But I think it's a structural theme and it's a gradual theme.

LW: Name three of your highest conviction holdings right now.

Goel: The first idea comes from India, it's called HDFC Bank (NSE: HDFCBANK). I think most of the investor would know it. It's the largest private sector bank in India, and it has been one of the most promising bank, the highest alpha generation for our strategy over the last seven, eight years. This banks is going through a merger with its parent called HDFC Limited, which is one of the largest private mortgage company in India. And this merger will create a very balanced portfolio for the bank where mortgage will now become almost 25% of its balance sheet and the rest will be very strong consumer lending, SME lending, and corporate lending.

This bank has shown a very strong underwriting culture over the last two decades, where their underwriting has been completely differentiated from what we have seen through the asset cycle in the country. But what another very important point of this bank is the strong liability franchise. The customer deposits are very granular, very retail in nature, and they have been very sticky.

At a time when everybody's worrying about deposit outflows from large banks, I think, this banks provides you a franchise where deposit franchise is very granular, very retail.
We don't worry about any effect on that deposit franchise because of higher rates and the underwriting culture and the structural growth remains as strong as it has ever been. So, that's one idea which we like a lot.

The second idea comes from China, China Mengniu Dairy (HKG: 2319). It's one of the largest dairy company in the country, a very stable business. But I like the management team strategy of focusing on the right areas of growth. So, they're focusing on adult nutrition, they're focusing on fresh milk, they're focusing on value added product like cheese, and while continue to maintain premiumisation of their portfolio. So, this is a business which can continue to grow low double-digit for next 5 to 10 year in a market like China, driven by premiumisation and driven by right focus on right categories, and are available to us at a very reasonable price of high teens price to earnings next year.

And the last business comes out of Brazil, which is a very cyclical market and very volatile place. There's a company called Localiza (BVMF: RENT3), which is the largest car rental business in Brazil. This company is as large as it buys 15% of all cars sold in Brazil every year. They have massive pricing advantage versus the consumer they rent their cars to, but they have also very massive financial advantage because rates for consumers in Brazil are very high and this company can borrow at a very reasonable interest rates.

So, they are very efficient in how they turn over their portfolio. They have massive pricing power and we believe that Brazilian car market will continue to shift from ownership to rental. And this is a structural double-digit growth business available at a very right price at this point of time.

03 April 2023

Emerging markets

Amit Goel

Amit Goel

Lead-Portfolio Manager, Fidelity Global Emerging Markets Strategy and Portfolio Manager, Fidelity India Fund

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