Barron\'s 03.16.2020

(やまだぃちぅ) #1

M4 BARRON’S March 16, 2020


EMERGING MARKETS


China, India Could Lead


WayinStocksRebound


I


t’s hard to think about dust settling


from the Covid-19 pandemic when


each day brings a blinding new storm.


But the case is building that China


and other emerging markets could lead the


inevitable rebound in stocks.


“We see a pretty bullish outlook for


emerging markets,” says Olga Bitel, global


equity strategist at William Blair. “The last


few weeks have increased our confidence


on the margin.”


As the U.S. and Europe scramble to


contain the mushrooming virus, the much-


derided responses of China and neighbor-


ing South Korea suddenly look Solomonic.


“What we’ve seen in China and Korea is


a textbook example of how these emergen-


cies should be handled,” says Alejo Czer-


wonko, emerging markets strategist at


UBS Global Wealth Management. “Emerg-


ing markets are in a sense ahead of the


curve.”


China is particularly impressive with its


policy response to Covid-19’s economic


damage. Beijing’s fiscal stimulus should


amount to some 2% of gross domestic


product, Czerwonko estimates, through


targeted measures ranging from cutting


employers’ social security tax to subsidiz-


ing rent for small businesses.


Western democracies, with their heavy


government debt loads and fractious poli-


tics, will strain for such scale and preci-


sion, says David Dali, portfolio strategist at


Matthews Asia. “There’s a very strong


perception that the Chinese government


has the firepower and can use it as


needed,” he says.


Emerging markets are getting an unex-


pected bonus from oil prices, which have


plunged by a third, to a four-year low,


since the top two exporters, Saudi Arabia


and Russia, failed to agree on production


curbs on March 6.


Crude will remain depressed even after


the global economy starts rebounding from


the coronavirus shock later this year, Bitel


predicts.


“Lower oil prices from the Saudi-Russia


split are likely to last longer than the epi-


demic,” she says. That’s good news across


Asia, especially India, where petroleum


imports exceeded 3% of gross domestic


product in the last fiscal year.


The current market tumult could at last


undermine a dollar whose strength


through most of the past decade has prob-


ably been the biggest drag on emerging


market stocks.


The trade-weighted greenback has


climbed by a third since 2011, dimming the


allure of ex-U.S. investments. But the halv-


ing of 10-year Treasury yields over the


past three weeks to less than 1% is tarnish-


ing their attraction as a haven.


A federal budget deficit already pushing


5% of GDP before anti-crisis measures


does not bolster confidence either.


“This could represent an inflection


point lower for the U.S. dollar,” says Howie


Schwab, an emerging markets portfolio


manager at Driehaus Capital Management.


“EM currencies are as low as they have


been relative to global export share.”


Calamity at home and the approaching


U.S. election may also make President


Donald Trump less keen to re-escalate a


trade conflict with China that held down


emerging markets most of last year, adds


Tim Murray, a multi-asset capital markets


analyst at T. Rowe Price.


“The silver lining here may be that trade


wars get pushed onto the back burner,” he


says.


The prevailing tide won’t lift all emerg-


ing markets equally, investors caution.


Latin America is dominated by Brazil,


Mexico, and other oil exporters that will


suffer from the price collapse.


Countries with precarious current ac-


count positions may get walloped by fear


in global credit markets. Schwab of Drie-


haus is underweighting Turkey and South


Africa on this premise. But China, India,


and other core Asian markets may bounce


back sooner than you think.B


By Craig Mellow


EUROPEAN TRADER


U.K. Quality-Control Firm


Fails Test for Good Value


P


roduct-testing companyIntertek


Grouphas had a good run as cus-


tomers increasingly need quality


and safety assurance in an era of


rising regulation.


The British company, a component of


the FTSE 100 index, has seen its shares


(ticker: ITRK.UK) rise 269% over the past


decade but sink recently along with most


of its peers. Shares are down 18% this


year.


Intertekearlier this month warned that


its performance will be affected by the


coronavirus, which has disrupted the sup-


ply chains of its clients in China. While it


has operations in more than 100 countries,


including Hong Kong and Taiwan, about a


fifth of group revenues comes from China.


Intertek tests, inspects, and certifies a


range of products including appliances,


furniture, medical devices, and food.


The company’s reliance on international


trade—which is under pressure from trade


wars and fallout from the virus—means


Intertek isn’t a good short-term bet, and


investors should take profits. Its business


thrives off the free movement of goods.


The more trade, the more items cross bor-


ders, requiring validation that they comply


with local consumer laws.


Last week Intertek said it’s too early to


gauge the impact of the virus on its busi-


ness. The company already has shut a gar-


ment center in Kowloon for two weeks,


after an employee became ill.


Broker RBC Capital Markets has


marked the stock Underperform, with a


target price of 4,000 pence. Shares are


currently trading at about 4,850 pence.


Morningstar Equity Research predicts the


stock will fall to 3,900 pence.


Kate Somerville, an analyst at RBC, told


Barron’sthat the stock “is trading at the top


of its peers despite delivering the lowest


organic growth over the past five years.”


The firm, which has 46,000 employees


and a market value of £8.7 billion ($11.3


billion), fetches a fat 25.3 times this year’s


expected earnings and is valued at a 20%


premium to its peers. Last week it posted


strong 2019 figures, with a significant


6.8% dividend hike and pretax profit of


£443 million for the 12 months ended Dec.



  1. Revenues were £2.9 billion.


Chief Executive Officer André Lacroix


toldBarron’sthat 2019 “was the fifth con-


secutive year of revenue, EPS, and cash


progression, which is a testament to our


strong operating platform.”


Shore Capital forecasts that earnings


could rise by 12% to £496 million by 2021.


Intertek traces its history back 130


years, when three quality-testing compa-


nies were formed and later merged. In


1885, Caleb Brett’s British marine-survey-


ing business offered testing and certifica-


tion of ship cargo. Three years later in


Montreal, Quebec, Milton Hersey estab-


lished a chemical-testing laboratory, and in


America Thomas Edison’s Lamp Testing


Bureau was formed in 1896.


They each came together over the next


century, under Inchcape, which bought


multiple testing and inspection companies.


Inchcape diversified, and in 1996 sold its


testing business, which was renamed In-


tertek. Intertek later listed on the London


Stock Exchange, and entered the FTSE


100 in 2009.


Intertek has offered long-term pros-


pects in an environment increasingly fo-


cused on compliance. But it’s heavily ex-


posed to China, with little means to


mitigate such geographical reliance. Its


core business is in testing, and if there are


fewer manufactured items to test, that’s a


strategic challenge that is hard to offset.


The worry is that it’s impossible to


quantify the short-term hit or its duration.


According to Shore Capital, “We clearly


can’t rule out a longer lasting economic


impact” and that “some revenue is likely to


be lost permanently.”


Investors with a taste for assurance


should look elsewhere for reassurance of


future value.B


By Rupert Steiner

Free download pdf