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Stock-picking approach on emerging equities to address tricky market environment

18.10.2018

Our investment approach focuses on seeking out quality growth stocks at a reasonable price and with this in mind, we expect two major trends on emerging countries’ equity markets out to the end of the year.

Firstly, countries seen as fragile are set to remain under pressure. Against this backdrop, we continue to hone in on businesses where the growth outlook is not directly tied to the country’s economic performances or its currency in these markets: good examples are Naspers in South Africa, which is driven more by world internet growth than South African economic trends via its stakes in world internet heavyweights Tencent and Delivery Hero, along with life and P&C insurance leader Sanlam, which is buoyed by the structural lack of this kind of service in South Africa and Sub-Saharan Africa. Meanwhile in Brazil, stocks like long steel market leader Gerdau – which derives close to 50% of revenues in the US – should also benefit from an attractive positioning in the current market environment.

Tech stocks in a strong position
The second trend is on tech stocks, which have suffered a severe derating over recent months and now trade on around 13x forward 12-month earnings, or a 30% discount to tech stocks in developed markets. Any potential rebound looks most likely to take place in this sector on the back of both valuations and the weighting of these stocks on emerging markets (~25% of their market capitalization). In our portfolios, we have a preference for stocks like Tencent, one of the Chinese internet heavyweights with a very strong presence on online gaming, social media (instant messaging services QQ and We Chat) and online payment. We also favor Weibo, a Chinese cross between Facebook and Twitter. Lastly, in the semi-conductor sector, Taiwan stock TSMC, one of the world leaders in the industry, continues to boast double-digit sales and net profit growth.

External factors are having an increasing impact on emerging markets in the current volatile and uncertain market environment, so we believe that stock-picking is more crucial than ever, as we seek out stocks that can stage structural earnings growth, built on a solid balance sheet or strong cash flow generation.

Emerging Equities Management Team

On 3 April 2018, Natixis Asset Management became Ostrum Asset Management.