11th April 2013
Economic growth is no guarantee of stock market performance says Julian Thompson manager of the Axa Framlington Emerging Markets fund.
In a note issued this week, he says: “Even if we are positive on a country from a macro perspective, we still need to find the individual stocks which will provide opportunities for good returns. In an environment where growth is weak, we are seeing a wide sector dispersion and we believe it adds value to take a sector focus.”
Thompson favours sectors such as consumer staples rather than energy firms as it is difficult to find growth stocks.
He writes: “There are a number of opportunities in the consumer staples and consumer discretionary sectors, particularly in countries such as Brazil where the domestic sectors are driving growth and unemployment is at a record low. We are currently underweight in energy as, with a few exceptions, it is typically difficult to find growth stocks and energy companies tend not to pay a dividend.”
He says that financials is polarised. Overall his fund is underweight yet at the same times three of the funds top four holdings are financial stocks.
“We favour mid cap financial stocks such as the Bank of Georgia, which is funded by deposits and has good growth prospects. It is currently trading at six times p/e and we have confidence in the management who we know very well,” he says.
In terms of countries, Thompson particularly favours Mexico and Thailand.
“Mexico is a prime example of an emerging market which shows the opportunities that can arise if inefficiencies in a country are tackled. There is political consensus for reform in Mexico and pacts in place targeting fiscal, infrastructure, energy, education and competition reform. As a result, GDP could rise by a further 1% to 1.5% to reach 5% in three years’ time. Mexico is competitive for a number of reasons. It is close to the US, creating a short supply chain, and is an increasingly investor friendly environment. It is also regaining competitiveness versus China, as it has not experienced the wage inflation we are witnessing China, and also benefits from a flexible labour market. Mexico’s pension fund industry is another key attraction for us. It is obligatory in Mexico to invest in a private pension and the country’s pension fund industry is growing at 15% per annum. This supports the domestic equity market as there is a large pool of capital available for investment. Bolsa de Mexico is a stock that is benefiting from this growth. Unlike other stock exchanges, the majority of its revenues come from listings which are a steady source of income as all debt and equity investments by pensions funds have to be listed. The stock currently has a 4% dividend yield.”
“We believe that fiscal policy will be the next lever of growth for emerging markets. Many emerging markets remain very conservative in their fiscal policy, however, Thailand provides a good role model. Thailand is using its domestic policy to promote growth, for example in its fiscal response to the floods earlier this year. We are seeing a redistribution of wealth to rural areas in Thailand, creating a virtuous circle of investment and consumption.”