China, India & Brazil - what's hot, what's not.

Alex Duffy, Portfolio Manager, Fidelity Global Emerging Markets Fund 

Alex takes a look at some of the largest emerging markets in his portfolio and discusses their unique challenges of investing in these markets, plus the selective opportunities that can be found.

China (21.9% of the Fund as at 30 September 2017)

Where are the stock opportunities in China? 

China has always had the ability to polarise opinion.  Over the last 14 years that I have been investing in China, what has really stood out to me about China is that you can’t put everything into a single bucket. China is multi-faceted, whether it’s a regional level within China or at a company level.

My starting view is that there are great opportunities in the Chinese equity markets to find good stock ideas. China does have challenges with excessive state intervention, debt in the economy and some over-investment in certain industries. However, there are very well run domestic businesses that have robust governance practices, focusing on underlying returns and growing the business incrementally.

The portfolio has significant exposure to China in a local perspective. Seven to eight per cent of the portfolio sits within China A-shares in well run local businesses with a robust corporate plan, who are adding value to customers through good products and to shareholders, through growing dividends over time. 

What about the inclusion of A-shares? 

Inclusion of A-shares into Chinese indices will lead to a significant expansion of the opportunity set and the more options, the more opportunities we have to add value to the portfolio.  As is ever the case though, it will be our job to be discerning - leveraging our research platform and local research team covering Chinese companies to make to identify the structural winners from the losers - of which there will be many on both sides.

India (12.8% of the Fund as at 30 September 2017)

A favourable economy for growth

India has a very large domestic marketplace and a growing consumer class, which is the key attraction. You have very well-run domestic companies allocating capital into a large domestic economy therefore delivering healthy earnings growth rates and increasing in business size and opportunity set.  At the same time, structural reform has been introduced through GST tax implementation over the last six months which has led to a much greater ease of business practice within India helping to unleash a large domestic economy. 

The challenge is to find opportunities without overpaying

The challenge is finding those opportunities that offer that exposure, positive trajectory of earnings growth at an appropriate valuation. A number of the domestic run companies are already priced to perfection based on this very positive outlook. 

There are opportunities to be found, such as HDFC Bank (5.21% of the Fund and my largest overweight), who is able to deploy significant amounts of capital at very healthy incremental rates of return - and we are really benefiting from the compounding at a mid-teens PE multiple.  Cummins India (1.32% of the Fund), an industrials play in the portfolio, is also benefiting from the improvement in capital spending in line with the improvement in the Indian economy.   

India provides some great opportunities but as ever in emerging markets, you need to be selective to ensure you are not overpaying for the favourable backdrop.

Brazil (8.2% of the Fund as at 30 September 2017)

Selective opportunities to be found

Brazil has a very large natural resource base and a young growing population but in order for it to really move forward it needs significant structural reform. The political backdrop is challenging and needs to be addressed if the economy is going to meet its long-term potential.

Despite this, current valuations are relatively attractive in the equity market and there are some very well run domestic companies. Looking at the currency and valuation backdrop, there are some good stock ideas to be found but we need to be aware of the longer term outlook and the ability of Brazil to move forward at a structural reform level.

My approach is to be selective, find good bottom up businesses that have good cash flow return profiles, run in the interest of minority shareholders that are able to generate healthy returns to be able to withstand the conditions of structural reform.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

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.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets.

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 should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken 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. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

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