14 BARRON’S October 26, 2020
China emerging as the only major
economy to expand this year and
Latin America projected not to return
to prepandemic levels until possibly
Since emerging markets don’t
move in lockstep, selection is key.
Fund managers favor Asian
countries like Korea, Taiwan, and
China, which entered the pandemic
in much better fiscal health but also
got an earlier handle on the virus,
and are already reaping some of the
benefits. Also favored: fast-growing
technology and health-care stocks
whose growth has been supercharged
as the pandemic sped up digitization
and sharpened the focus on health
and drug development.
The preference for Asia is under-
pinned by China’s response to this
crisis. Instead of rebuilding the
economy through investments in
roads, ports, and bridges that
benefited much of the rest of the
world after the global financial crisis,
China is building its own economy
and self-reliance, focusing on 5G,
cloud computing, and health-care
infrastructure that boosts domestic
companies as well as those in Taiwan
and Korea that supply the technology
needed. It’s reflected in performance:
TheiShares MSCI Emerging
Marketsexchange-traded fund
(ticker: EEM) is up just 3% this year,
while theiShares MSCI Emerging
Markets AsiaETF (EEMA) has
gained almost 11%.
“In the past, we invested through
China proxies, like Australian and
Brazilian metals and mining companies
or South African materials, but now
you have to invest through China,
AfteraDown
Decade,Emerging
MarketStocks
AreLookingUp
Selection is key. But in overseas markets, there are
internet and health-care companies that are still in
their growth trajectories, offering big opportunities.
Asia Outpaces
The iShares
MSCI Emerging
Markets ETF is
up just 3% while
the iShares
MSCI Emerging
Markets Asia
ETF has gained
almost 11%.
$35B
Amount Ant Group
is expected to
raise in its IPOs
I
nvestors hungry for growth
have fixated on a handful of U.S.
technology giants. But those
who cast a wider net are finding
emerging market companies
that are younger and sometimes
cheaper than the FAANGs—
Facebook, Amazon.com, Apple,
Netflix, and Google parent Alphabet.
After underperforming the U.S. for
a decade, emerging markets face an
improving backdrop. More fiscal
stimulus and a global recovery from
the pandemic, along with a weaker
dollar that makes foreign assets
cheaper for U.S. investors, should help
emerging markets over the next year,
says Mona Mahajan, strategist at
Allianz Global Investors.
What’s more, emerging markets are
rife with internet and health-care
companies that are earlier in their
growth trajectories and have bigger
market opportunities. Emerging
market stocks on the whole trade at
15.5 times forward earnings, versus 22
for the S&P 500 index, attracting
investors looking for relative bargains.
Retail investors allocated new money
to emerging market equity funds in 10
of the past 13 weeks, according to
EPFR Global.
Some of that discount is warranted,
as countries like Turkey and South
Africa have been mired in political,
economic, and fiscal strife, while
Brazil and India entered the pandemic
with weak economies, limiting their
options for dealing with the corona-
virus. The unevenness of the recovery
was showcased in the International
Monetary Fund’s latest outlook, with
By RESHMA KAPADIA
focusing on its domestic economy,”
says Todd McClone, co-manager of the
William Blair Emerging Markets
Growthfund (WBENX), which has its
highest-ever allocation to China, Korea,
and Taiwan.
China’s focus on itself benefitsNari
Technology(600406.China), which
provides secondary equipment and
software that are central to the
transformation of the country’s power
grid as digitization drives more
demand, says Adam Montanaro, co-
manager of the $4 billionAberdeen
Emerging Marketsfund (GEGAX).
For a company that should generate
mid- to high-teens earnings growth,
Montanaro says, Nari trades at an
attractive 16 times forward earnings.
Also attractive are China’s
consumer-oriented companies. Early
data from this month’s Golden Week Minh Tang/Huazhu
Novotel Xian Bell Tower is one of the hotels owned by Huazhu, which is benefiting from Chinese travelers staying closer to home.
October 26, 2020 BARRON’S 15
holiday suggested some return to
normalcy, with more than half a bil-
lion local trips taken and travel traffic
recovering to roughly 80% of pre-
pandemic levels. However, Chinese
are staying closer to home rather
than jet-setting. That benefitsChina
Tourism Group Duty Free
(601888.China), which has gotten a
boost from Beijing relaxing duty-free
shopping-related rules. Yet, Montan-
aro says the market is “significantly
underestimating” the company’s
earnings, which could see com-
pounded growth in the high teens
over the next decade, as Chinese
shoppers gain more access to duty-
free shopping at home.
Travel trends also benefit hotel
companyHuazhu Group(HTHT),
which has had a strong rebound. The
company trades at 24 times enterprise
value to 2021 earnings before interest,
taxes, depreciation, and amortization,
or Ebitda. Huazhu is “growing into”
that multiple quickly as the sector
recovers and is able to be a
consolidator of smaller, struggling
chain hotels, says Montanaro.
The focus on consumers also feeds
fund managers’ continued preference
for technology. Many see even bigger
growth potential for emerging market
titans compared with their U.S. peers
because these companies have been
more one-stop shops, often mixing
social media, e-commerce, financial
technology, and gaming. And they
are pushing into new markets that
can be significant.
Alibaba Group Holding(BABA)
birthed fintech giant Ant Group,
which is currently the most valuable
start-up and is expected to raise as
much as $35 billion in its coming
public offerings in Hong Kong and
Shanghai. Alibaba has a 50% market
share in the Chinese cloud-computing
market, which is much earlier in its
development than in the U.S., and it is
also building a health-care ecosystem
with Alibaba Health.
“It’s growing faster than Amazon,
has a larger addressable market, and is
trading at a discount to Amazon,” says
McClone. Alibaba’s sales grew 30%,
and its net income growth was more
than twice that in the last fiscal year,
compared with 20%sales growth for
Amazon and 15% profit growth. Yet,
Alibaba trades at 28 times forward
earnings, compared with Amazon’s 76
times.
Multiple digital businesses rolled
up in one is popular elsewhere in
emerging markets, creating oppor-
tunity even in countries with less
attractive economic backdrops. India’s
Reliance Industries(RIL.India) has
transformed from an oil and gas
conglomerate into a mix of the Chinese
versions of Verizon, Facebook, and
Amazon, attracting U.S. internet
companies that want to push into
India. Those partnerships have given
Reliance an infusion of capital to
reduce debt it accumulated to revamp
its business.
At 26 times forward earnings, the
stock has seen some benefit from this
transformation, but McClone doesn’t
see the stock as expensive when
considering the longer-term growth
prospects for its early-stage
omnichannel retail and digital-
services business. Plus, Reliance’s
energy unit still makes up two-thirds
of the business—and this cash cow is
being transformed into an integrated
oil and chemical company that should
reduce its earnings volatility in
difficult economic conditions and
ultimately improve refining margins.
“The market has been behind this
story because it’s been so dramatic.
It’s like being behind on Amazon and
Alibaba. It’s tough to value without a
long-term view,” says McClone of
Reliance, one of the William Blair
fund’s larger positions.
In Latin America,MercadoLibre
(MELI) is the region’s dominant e-
commerce and fintech company.
Although the stock has more than
doubled this year and sports an
astronomical price/earnings ratio,
Sara Moreno, co-manager of the
PGIM Jennison Emerging Markets
Equity Opportunitiesfund
(PDEAX), sees more opportunity. E-
commerce penetration in Latin
America, for example, is under 5%,
compared with 20% in China, and
Moreno says the market isn’t yet fully
pricing in the company’s still-nascent
fintech arm.
“Higher-margin services like asset
management and credit are just
starting and can rise from their
current 16% of revenues today to
40%-plus in the next five years,
adding not just to [sales] but to
margins, as well,” Moreno says.
B
razil’sMagazine Luiza
(MGLU3.Brazil), known as
Magalu, is another company
that is still early in its growth.
While shares have run up in
recognition of the home-furnishing
and electronics retailer’s evolution
into an omnichannel retailer, Moreno
says that the market doesn’t yet fully
reflect the opportunity for the
company’s credit and service business
that helps smaller retailers with their
digital evolution.
Another nascent sector attracting
growth investors is health care, as
rising incomes in the developed world
fuel demand for better drugs, hospital
care, and medical devices.
Roughly a quarter of the PGIM fund
is invested in health care, with Moreno
citing the breadth of opportunity.
Among Moreno’s holdings:Innovent
Biologics(1801.Hong Kong), which
Moreno describes as a potential leader
in China’s emerging biotech industry,
with a deep pipeline and partnerships
with the likes of Eli Lilly and Roche,
andJiangsu Hengrui Medicine
(600276.China), which has a strong
oncology franchise and reminds
Moreno of Pfizer in the 1990s.
Innovent’s shares are up 150% this
year and may not look attractive by
conventional metrics, given that it isn’t
profitable. But long-term investors
such as Moreno still see the stock as
attractive because of its deep pipeline
with a tilt toward oncology and
autoimmune therapies. Analysts
expect it to turn a profit by 2023.
The same holds for Jiangsu: While
not cheap on the surface at 59 times
forward earnings, the company has
averaged 23% free cash-flow growth
over the past five years. Analysts on
FactSet have an average rating of
Overweight and a price target of 102
yuan ($15.27), representing a 14% gain
from a recent 89.58 yuan.
While much of the focus has been
on Jiangsu’s PD-1 drug for Hodgkin’s
lymphoma patients, Moreno says that
several other treatments can deliver
double-digit growth. It also has a
leading position in China’s anesthetics
and contrast-agent markets.
Fund managers with a heavy
helping of Chinese stocks acknowledge
the possibility of interim volatility from
U.S.-China tensions, and some, like
McClone, have swapped U.S.-listed
Chinese companies for their Hong
Kong listings and sold companies in
the direct path of the technology battle
between the two countries.
But analysts say that many China-
related proposals, such as those aimed
at restricting China’s access to
technology, have been narrower in
scope following implementation, with
limited impact on the domestically
oriented companies they focus on.
“The noise level is going to stay high
regardless of who wins, so you have to
tread carefully. But the opportunity is
undeniable,” says McClone.B
Looking Beyond U.S. Tech Giants
Nine emerging market stocks with plenty of growth ahead--often for less than U.S. peers
Market Forward PEG
Company / Ticker Recent Price Value (bil) P/E Ratio 2020E EPS 2021E EPS
Alibaba Group Holding / BABA $307.97 $833.3 28.5 1.1 $9.07 $11.
China Tourism Group Duty Free / 601888.China CNY 195.60 57.3 46.6 1.0 CNY 2.45 CNY 4.
Huazhu Group / HTHT $42.84 13.7 52.9 2.1 -$0.72 $1.
Innovent Biologics / 1801.Hong Kong HK$66.20 12.0 N/A N/A -HK$0.66 -HK$0.
Jiangsu Hengrui Medicine / 600276.China CNY 89.58 71.3 59.3 2.4 CNY 1.24 CNY 1.
Magazine Luiza / MGLU3.Brazil BRL 26.22 30.4 266.0 7.3 BRL 0.03 BRL 0.
MercadoLibre / MELI $1,299.13 64.6 644.1 N/A $1.12 $2.
Nari Technology / 600406.China CNY 19.98 14.2 15.6 N/A CNY 1.12 CNY 1.
Reliance Industries / RIL.India INR 2,124.60 190.2 25.9 1.7 INR 65.12 INR 88.
E=estimate. PEG=price/earnings to earningsgrowth. N/A=not applicable Sources: Bloomberg;FactSet“The noise
level
[between
China and
the U.S.] is
going to
stay high
regardless of
who wins, so
you have to
tread
carefully.”
Todd McClone