e-fundresearch.com: What are your personal lessons learned from year-to-date market developments?Julie Dickson: 2017 has been marked by a sharp contrast between ever increasing market returns and low volatility. In such an environment, it’s easy to get complacent. Against a backdrop of political uncertainty in developed markets, a resilient consumer, and strong results in emerging markets, it’s difficult to imagine what risks lie ahead. Growth appears healthy across the world, backed by robust earnings. Valuations however are not uniformly high across all markets, so stock selection has a role to play. It is also important to remember that equity markets have been fuelled by significant accommodative monetary policies across the world, several of which are coming to an end. Therefore maintaining a long-term view, backed by rigorous fundamental analysis to identify companies that can endure upheaval over a full market cycle, should help investors withstand the risks that lie ahead in our view.
e-fundresearch.com: To what extent has your strategy been able to benefit from this year's market environment and which particular investment themes have delivered the strongest performance contribution on a year-to-date perspective?
Julie Dickson: Taking a global approach to emerging markets has enabled us to capture growth while maintaining lower exposure to risk. There are three clear themes from the New World strategy’s current positioning that are driven by our rigorous stock selection process. We have high-conviction investments in innovative companies that have platform businesses – such as China’s Tencent and Alibaba. As a whole, information technology companies have had a strong year, driven primarily by a handful of the largest players in the sector, which has provided a tailwind to these investments.
Emerging market-domiciled banks have also showed strong gains this year. We have very strong convictions in companies that are leaders in their markets – such as certain private banks in India.
We actively seek out exposure to the emerging market consumer through both emerging market- and developed market-domiciled companies. The structure of the MSCI Emerging Markets Index is such that there are very few emerging market-domiciled consumer companies – they are likely to be owned by the state, multinationals or families, and we just cannot access them. So we access them via developed market companies. For example, half of British American Tobacco’s revenues come from emerging markets. Then there’s healthcare: emerging market-listed healthcare companies are very scarce. So we choose to access them via developed market companies. These companies are well positioned to benefit from the rising income levels in emerging markets.
e-fundresearch.com: With regards to the coming year: How optimistic is your view into the future and what obstacles and challenges should investors be prepared to overcome in 2018?
Julie Dickson: Potential challenges we are monitoring include the US and the future of free trade, the sustainability of growth in China and rising emerging market debt levels.
While threats to world trade have shown signs of diminishing since the beginning of the year when protectionist president Donald Trump took office in the US, we are far from being in the clear. This is an area we are monitoring closely. We are, however, excited about opportunities in new areas of global trade such as information and data flow, and the rise in global consumption, in particular in emerging markets.
Economic growth in China has been ahead of the government’s full-year target so far this year, reaching 6.8% for the third quarter. However, there are concerns that short-term gains fuelled by credit stimulus come accompanied by longer term financial risk. Corporate debt is very high at 169% of GDP, while household debt remains low but is rising quickly. The central bank is committed to addressing these issues, but this process is expected to deliver medium- rather than short-term results.
Although a number of countries in Africa and Latin America face serious fiscal challenges, government balance sheets are in decent shape in numerous other developing economies. Debt-to-GDP ratios, a measure of a country’s indebtedness, are lower than they have been. And where debt loads are heavier, it’s often a sign of maturing bond markets.
e-fundresearch.com: Why should investors consider an increase in allocation to your asset class and in particular your strategy in 2018?
Julie Dickson: Our New World strategy advocates taking a global approach to accessing emerging market growth. This is because we believe that the traditional emerging market index is highly concentrated in terms of regions and sectors, so investors can end up with a very narrow window into the emerging markets opportunity, and at the same time a lot of concentration risk. Currently, 72% of the MSCI Emerging Markets Index is Asia-based; China alone is 30%. IT and financials together comprise more than 50% of the index. At the same time, the index’s combined market cap is US$5 trillion – only 17% of the combined GDP of emerging markets. Furthermore, the exposure to areas such as consumption and healthcare – two main beneficiaries of global emerging market growth – is limited. Looking beyond emerging market-domiciled companies provides a much broader opportunity set, meaning we can include multinational companies that are generating profitable growth from their emerging market operations. These are often more seasoned, resilient companies and therefore more stable. This is one of the helpful elements for containing risk in down markets. Lastly, we have alignment with company boards and management. They think about the world the same way that we do – generating revenues and profits in emerging markets has nothing to do with a company’s home address.