The value of emerging markets in the next industrial revolution
Jorry Rask Nøddekær
Lead Fund Manager, Emerging Markets & Asia Team
While the short term is going to be dominated by COVID-19 globally, we remain upbeat about the longer-term return opportunities in emerging markets. The opportunity set includes a number of exciting, dynamic countries with great companies and growth potential ahead where they are themselves creating their own future. China, South Korea and Taiwan, for instance, are not growing as fast as they were, but they now offer access to a society that is highly educated and where companies have been at the forefront of R&D investment into new technologies.
In March, we disagreed with the way the market was pricing the companies in our portfolio. Instead, we believed markets were way too pessimistic and felt it was a strong buying opportunity for long-term investors. Our view at the time was that around 90% of industries in emerging markets would have a V-shaped recovery and be more or less back to pre-COVID-19 levels in 2021.
We see the most exciting stock-picking opportunities coming out of the next industrial revolution/technology upgrade cycle which will be centred around 5G, the collection and use of data, and artificial intelligence. Technology will influence the world in the next decade in a way we have not seen before, and Asia will play a key role in this new cycle which will, in turn, result in attractive investment opportunities. As we move from a globalised to a multi-polar world, technology will be essential in the new structure and we are strong believers in the growth opportunities we can identify in these areas.
We see the most exciting stock-picking opportunities coming out of the next industrial revolution/technology upgrade cycle which will be centred around 5G, the collection and use of data, and artificial intelligence.
We recognise the classic emerging market growth has been disappointing over the past decade, but we still believe there are real growth opportunities in markets such as India, Indonesia, Vietnam and Brazil. We have meaningful exposure here through companies that should significantly benefit from the way these societies are changing – and we believe in our approach that means we only need to identify 50 good stocks.
At a country level, key markets like China, South Korea and Taiwan have managed the COVID-19 crisis extremely well. However, people’s lives have changed, particularly with the massive move online, whether they are buying essential goods or being entertained. Some business models have seen a significant improvement in their operation and outlook and in a number of cases we do not believe the market has yet priced this in. We are also slowly increasing our exposure to companies focussed on their domestic economy in markets like India and Vietnam that saw large drops in March.
We are also adding to technology names we believe will benefit from the 5G revolution and the impact it will have on the rest of the technology sector. The funding for this has come from reducing our exposure to the few consumer staple names that held up well during the selloff as well as healthcare and internet names that we have been reducing or selling out of on the back of strong performance. This recycling of capital to more attractive risk/reward opportunities has allowed us to maintain an attractive portfolio that, in our view, offers attractive return prospects for the medium to longer term.
We live and work in a dynamic, fast-changing world so have built a process that seeks to identify structural trends and companies that can benefit from these developments – or even create them – and navigate the changes that come from market cycles, politics, pandemics and so on. We believe the EM Stars strategy and its fully integrated sustainability Economic Value Added (EVA) valuation framework has shown it can find companies that can create sustainable shareholder value over the long term as well as stand the test of market surprises.
In the nine years since the strategy was launched, we have continued to enhance the process around truly integrating sustainability into our EVA valuation framework. These past nine years have also seen great change in emerging markets, and we believe our process has shown its ability to generate alpha in an asset class that offers tremendous growth opportunities alongside its fair share of volatility and risk. We continue to strive to identify companies that can create sustainable shareholder value over the long term with alpha generation as the driving force for our outperformance.
Our investment philosophy is to allocate capital by focusing on long-term returns and alpha creation through the interaction of three essential factors:
Source: Polar Capital, July 2020.
Sustainability is essential for value creation to flourish and, as long-term investors, it has and always will be an essential part of our thinking about capital allocation. For us, sustainability includes environmental, social responsibility and governance considerations but it also needs to expand beyond these narrowly defined variables. Sustainability is about constantly interacting with stakeholders to expand the lifespan and lifecycle of a business, thereby enhancing the value of the capital being allocated – only then can you get an attractive return on that capital.
Investors are encouraged to take a long-term view in emerging markets as there has been and will continue to be volatility. It is therefore pleasing for us to have developed a process that has demonstrated consistency and provided relative and absolute outperformance over the long term. This has been the case throughout our time at Polar Capital, since June 2018, and we feel we have shown that when the really big test comes, the strategy has been able to deliver on the ambitions we set out for it.
Jorry joined Polar Capital in June 2018 to set up the Polar Capital emerging markets growth franchise in July 2018.
Prior to joining Polar Capital, Jorry worked at various firms including Nordea Investment Management, Danske Capital, F&C Investment Management, New Star Asset Management and BankInvest Asset Management.