The first one hundred days

September marked 100 days since portfolio manager, Amit Goel, was appointed to mange the Fidelity Global Emerging Markets Fund. Amit discusses his early impressions, enhancements to the Fund and the current EM landscape.


Q. Over the past quarter, since you’ve been managing the Fidelity Global Emerging Markets Fund, performance has been strong, but markets have been volatile in emerging markets. What's it been like managing the Fund over this period and what were the key changes that you have made?

I'm very pleased with what has happened in the last 100 days on the strategy in terms of performance, but more importantly for us, we’ve gone through a very smooth transition.

The volatility in the market has also presented a lot of opportunities to adjust the portfolio in some areas. For instance, we’ve increased our exposure to the IT sector, primarily in the semiconductor space, as we’re positive on this sector over the medium to long-term. Companies we own in this sector have become more competitive and we believe they are the best companies within the value chain across semi-conductor industries. We found an opportunity to increase this exposure adding to our position in TSMC and adding a new position in SK Hynix.

At the same time, we’ve reduced our exposure to the commodity sector. Commodities have done very well for us in last 12 to 18 months and we’ve been overweight, particularly in the areas of copper and steel. We still like copper as a commodity medium to long-term investment, but copper prices have shot up too much in the short term.

Secondly, we’ve scaled back our position in commodity exposure due to concern of sustainability on some of the companies around issues such as coal mining, exposure to thermal coal and capital allocation. There have been other stocks where we have scaled down as part of our process and philosophy where the fund will be more highly focused on sustainability.

We’re also going to have a more disciplined valuation framework across our stocks. This doesn’t mean that we are selling out of our positions, but we are optimising the portfolio and rotation back into companies where we see better risk-reward and which fits our philosophy.

As part of that process, we’ve optimised our position in some of the Chinese consumer discretionary companies, like Li Ning and Shenzhou International, which have been great contributors to the portfolio. They're still a core part of the portfolio, but as they become more expensive, we’re adjusting their position sizing, and that money has gone back into some of the other names where we think the risk reward is better and the medium and long-term growth is intact.

And lastly in the last 100 days, we've continued to build a very strong pipeline of stocks to invest into.  They come across all the regions- in Brazil and Europe, the Middle East and Africa (EMEA), we have worked very closely on some of the digital businesses that can go into the portfolio. Similarly, in China, we have looked at some industrial companies and electric vehicle value chain companies. What we have now is a portfolio that we believe in and we continue to build on the pipeline.


Q. Many people would see Emerging Markets (EM) ex Asia as old economy style stocks, mining commodities, particularly, Latin America. Is it fair to say that if you're looking at Latin America or the Middle East, it's just a one way bet on commodities or is there other opportunities within these marketplaces as well?

It's a constant battle to impress upon people that Latin America (LATAM) and EMEA are not just about commodities. Yes, they have a very vibrant commodities market, and they have companies at the lowest end of the cost curve with a high resource base. But the truth is that if you look at the per capita gross domestic product (GDP) of the LATAM region, it's about 9,000 USD versus Asia, which is around 7,000 USD.

There is a vibrant consumption market that resides there. There is also a very vibrant digital FinTech and e-commerce market, which is shaping up really well in the LATAM space. In fact, LATAM produces some 250,000 engineers every year. And this digital knowledge is available at very, very competitive prices.

The entrepreneur in LATAM is capitalising and monetizing this digital knowledge base by disrupting the incumbent banks by disrupting the traditional retail. It's not fair to think of LATAM and EMEA markets only as commodity markets. We've seen some really good initial public offerings (IPOs) in LATAM outside the commodities sectors which are very strong businesses, in the last two years.  These will follow the same life cycle as some of the companies in China and the US and we believe that there is scope to make double digit return from these companies.


Q. It's interesting that you just mentioned Chinese companies given the noise around China. We've seen the educational sector take a huge hit because of some of the regulatory action undertaken by the authorities. It's also been a lacklustre year for Chinese equities. How is the team in Shanghai helping you navigate these pretty tumultuous waters?

That's a very important topic that we’ve been in discussion for the last three months. I will say that regulatory concerns or higher regulations is part and parcel of every Chinese business.

Previously, we have seen the same take place in areas like financials, property, healthcare, telecom. I think these are areas where government controls regulation with respect to demand and supply, what these companies can do, and how they allocate capital. We have always believed that these risks have been underestimated in the digital sector.

Because of these concerns, the portfolio was already under-weight in some of these businesses and now we have anti-monopoly regulations coming in. There are regulations on private education, and regulations on cybersecurity. And we believe this sector is going to be more regulated in future.

Now it's up to us as investors as to how we price in these regulations. I think we are never saying that China has become ‘uninvestible’. We need to understand these regulations and their long-term impact on profitability, as well as capital allocation of these businesses to get a better sense of how to value these businesses.

While the market has been quick to calculate the impact on profitability of these businesses and there have been large drawdowns, we believe that the market is still underestimating long-term capital allocation impact from these regulations.

We think there are a couple of businesses in this area that we really like. For instance, Meituan is a very competitive business in the Chinese food delivery space, and Tencent is still a competitive business. We are taking a cautious approach, but we are confident there are numerous investment opportunities which we are closely looking at.


Q. Turning to Brazil, you’re typically underweight in this country, but you’ve recently added a new stock from here to the portfolio. Can you tell us more about your rationale for buying Mercado Libre?

Our portfolio strategy is to create a best quality emerging market portfolio where we understand the businesses and buy them when they're available at the right price. So, a Brazilian company must compete with a Chinese company or an Indian company for its place in the portfolio. What we are looking for is a portfolio of the most competitive business on a global scale. So, while there are very good companies in Brazil, the valuation has to ensure that we are allocating the right amount of capital to that business.

In a market like Brazil, that has in the last 15 years seen a lot of political volatility and currency depreciation, the negative factors are always long term. Therefore, our discount rates are higher and our hurdle rates are higher. A very competitive business in Brazil which also crosses our hurdle rate, may find a place in our global emerging market portfolio.

Mercado Libre is the leading e-commerce and FinTech company in Latin America and is disrupting the banks. What's special about Mercado Libre is that it has created a comprehensive ecosystem of mutually reinforcing services. So, there is a core marketplace, which is supported by payment services, and it has an effective logistics and fulfilment capability. Think of it as the Alibaba of Brazil, which spans all ends.

Mercado Libre has 133 million unique active users; it touches 20% of the Latin population and 31% of the people with internet access. They operate in 18 geographies and they're pretty much a leader across all these geographies.

We believe that there is a huge runway of growth. E-commerce penetration in Latin geographies is still below 10%, and we think it will easily reach 30% in the next 10 years. We believe Mercado Libre will gain market share or remain the leader in this e-commerce penetration and growth led story.


Q. What are your thoughts and insights into India?

The COVID second wave in India in May and April was devastating, and the plight of the people going to hospital without enough beds in the months was just terrifying.

Barring a third wave, which might come through a new variant, we are moving to a more endemic stage.  The pace of vaccination has picked up, and India is administering approximately 10 million doses a day - on track to reach between 50 -60% of the population by the end of the year.  This is the best outcome - because with its limited financial resources, India cannot rely on lockdowns and restrictions.

India continues to remain a very attractive long-term market because of demographics, improving investment infrastructure, and increasing global trade share.

We continue to focus on these long-term structural opportunities. We’re positive on the financial sector, because that's where financial inclusion of the Indian middle class will happen, consumer credit will grow, and there are four or five very strong businesses which can capture that value.

We’re also positive on consumer discretionary spend. We own a company called Havells which is one of the leading consumer electronic companies in India, and they span across small appliances. Now they're moving into air conditioners, refrigerators, et cetera. And our experience with some of the Chinese consumer electronic companies comes very handy here. We understand how consumer electronic penetration grows in a country where GDP per capita is going to grow from about US?? $2,000 per capita to about US?? $5,000 per capita over the next 10-years.


Q. Can you explain how you're incorporating sustainability into the Fund?

We at Fidelity have our own proprietary Environmental, Social and Governance (ESG) ratings, which is our forward-looking assessment of the ESG credentials of the company. We don't paint all sectors with the same brush. As far as ESG is concerned, we believe that every sector has a different material factor, which needs to be analysed in detail. And we would like to focus on that. For example, in the oil and gas sector, emissions are most important, and for technology companies, it is about data privacy and cyber security.

We like to engage with companies with respect to these material factors. But what is more important is that our approach is to engages versus that of exclusion. Emerging markets are a little behind with respect to their ESG journey. We believe we are on a journey with the EM corporate and it is our responsibility to impress and explain to them the importance of sustainable business practices and how that adds value to stakeholder value creation. We have found that these companies have been extremely receptive and open-minded, and willing to engage with us and implement changes that suits their business.

We have a more holistic ESG framework, a framework which will make sure that first our portfolio will screen as one of the better sustainability portfolios amongst our peers. It’s also a process where we want to engage with companies and find companies which have a very sustainable and improving sustainability culture.

And as we look for improvements in the fundamentals of any business, if we see improvements on sustainability criteria, that's going to add value to our clients as well.


Q. Finally, what do you think the next 100 days look like for you?

It’s so hard to predict the future, but the fund will continue to follow the process and philosophy.  Any changes in the portfolio will be implemented based on our philosophy and process of understanding these businesses and buying them at the right price. We have a good pipeline of businesses on our watchlist, and you should expect a few new names into the portfolio.

We just want to put our head together and keep revisiting our assumptions, keep assessing the draw down risk, our cost of risk, hurdle rates, and deliver alpha over the long term. So, nothing changes. We will be aware of what's happening on the macro, and on the political front, but we will continue to focus on the nitty-gritties of the companies we own or want to own in our portfolio.