Please see below an article received late yesterday afternoon from Jupiter which provides their latest market views:
Global Emerging Markets
A land where banks can grow
Nick Payne, Fund Manager, Global Emerging Markets, highlighted the strong performance of emerging market equities this year, which are approximately back to their pre-Covid levels from earlier in the year. However, Nick wanted to talk about an area that has so far lagged behind: banks.
In contrast to developed markets, where banks are typically seen as mature, low growth businesses with low return on capital, in emerging markets the picture couldn’t be more different. There are around 2 billion people in the world without a bank account, the bulk of them living in emerging markets. Some of those are gaining access to financial markets through fintech solutions, but in emerging markets the traditional banks still have a big role to play, said Nick.
The ability to grow is the main thing that separates emerging market banks from their developed market peers. Nick used as an example the largest privately owned bank in India, with about 8% market share, that has the opportunity to capitalise upon the situation in rural India where there have been great strides made in building up a deposit base, but where banks are still in the early stages of lending to customers (the loan to deposit ratio is just 30%). Indeed, the bank’s CEO stressed that the potential opportunity is so large that at this stage they don’t need to go down the risk scale in order to achieve growth.
The underlying message for Nick is that there is still an enormous runway for growth for banks in emerging markets, and those that are strong enough to come through this crisis will emerge with their competitive positions enhanced. So while the high profile technology names understandably get a lot of attention at the moment, this is an alternative area that Nick sees as presenting a compelling long-term opportunity for emerging market investors, which the market should recognise as and when economies start to normalise.
Finding pockets of value in Latin America
Risk sentiment in emerging markets has improved in October, following a volatile September, noted Alejandro di Bernardo, Credit Analyst, Emerging Market Debt. The market has turned more positive on a possible Biden win in the upcoming US election, in the belief that a higher fiscal deficit will translate into a weaker dollar, which would be positive for emerging markets.
In Latin America, Brazil is expected to post the lowest decline in growth – estimated at 5% for 2020 – largely thanks to a huge fiscal stimulus package, of over 15% of GDP. PMI activity, consumer confidence, and other industrial indicators are showing a V-shape recovery. On the other hand, however, the political backdrop remains a concern there. Growth relies on subsidies, which isn’t sustainable; and Brazilian debt to GDP is expected to reach about 95% by the end of the year. Alejandro and the team expect the Brazilian real to remain volatile, and in terms of positioning, they prefer to focus on exporters with US dollar revenues. Alejandro used the example of a Brazilian pulp & paper company, with a significant market share and strong operating margins; as the industry was considered ‘essential’, it never closed during lockdowns. So, Alejandro said it’s possible to get paid a premium to have exposure to strong BB exporters in the region.
It is the opposite scenario for Mexico. The country is expected to post the biggest decline in GDP in the region, falling 9%, largely due to a much more conservative approach to fiscal stimulus from the AMLO administration. Politics there are quite stable, but growth is lacking. In Mexico, the team prefers companies with exposure to the US, and investment grade miners that have exposure to copper and gold, where demand is likely to benefit from a Chinese recovery.
Looking forward to 2021, Alejandro and the team take a positive view on countries like Peru, Paraguay, Chile, Guatemala and Panama, which entered the pandemic with very low levels of debt, and which have room to provide fiscal stimulus. Even in countries with weaker macro, the team can still find pockets of value in the BB space, in companies where fundamentals have recovered.
UK Equity – Small & Mid Cap
How to approach three ‘unloved’ buckets in UK equities
Tim Service, Fund Manager, UK Small & Mid Cap, shared his views on how to approach three of the most “unloved” themes in the UK market: stocks affected by Brexit, Covid-19 and value/cyclical stocks.
He said each of these themes requires investors to be “humble” and accept that taking a strong view on the stocks is difficult as outcomes are unpredictable and heavily impacted by politics.
One way to play Brexit exposure is through a domestic sector that is understandable and has growth potential but is disadvantaged by uncertainty around the UK-EU negotiations, Tim said. Housebuilders fit this description – with a dozen or so companies operating in a land market that is much less competitive than it was in the last cycle. The sector trades on 1 to 1.3 times book value and should generate high-teen to 20-plus percent return on equity in a year’s time with a “good” Brexit, he said. Challenger banks may also benefit as their valuations have been held back by concerns about Brexit.
A way to approach the Covid-19 theme is through travel stocks, which have been sharply impacted by virus restrictions, with the most likely scenario being the eventual control of virus transmission in the western world, Tim noted. He prefers to focus on good businesses with solid balance sheets or companies they would support if a capital raising were needed, and with the ability to come through the next six to nine months in a stronger market position.
Some UK cyclical/value stocks may benefit if after the US election there is an increase in infrastructure spending or if there is a change in the inflation outlook. Industrials and aggregates, for example, would fit this description.
Gold and Silver
M&A in the gold mining sector could double
The gold sector has seen around $20bn of mergers and acquisitions this year and this may well double in the next 3-6 months, said Ned Naylor-Leyland, Head of Gold & Silver.
The crisis in depleting reserves among major gold miners has been apparent for decades, said Ned, but it’s taken firmly rising gold and silver prices to get the market to focus on the need for consolidation. Previously, unreasonably low spot prices prevented gold miners from engaging in the sufficient exploration and development needed to boost reserves.
In Ned’s view, we are now at a tipping point of an incoming wave of M&A in the sector and it is the discounted tier one gold miners that he thinks will benefit the most. Elsewhere, Ned pointed to Q3 reporting from silver miners as one to watch: will silver’s spectacular rise this year translate into company numbers? While the market isn’t yet willing to pay a sustainable $20 per ounce for silver, he thinks that is inevitable at some point in the future given the demand for silver in electronics is only going to increase due to powerful trends like the internet of things and clean energy technologies.
I think one of the key messages to take from the above is that opportunity is still out there for investors, but it remains important to have a diversified portfolio, which is spread across a number of regions and sectors in order to benefit from these opportunities. Having a long-term view when investing is imperative, you should not focus on short-term volatility.
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Please keep safe and healthy.
Carl Mitchell – Dip PFS
IFA and Paraplanner