‘Emerging markets have been quite choppy in recent years, but we haven’t had a banking crisis [equivalent to Europe] and we have emerged relatively unscathed,’ says Chetan Sehgal, lead portfolio manager of Templeton Emerging Markets Investment Trust (TEM) one of the oldest emerging markets focused trusts.

Sehgal still sees lots of opportunities in the developing world despite a difficult year dominated by China’s unexpectedly difficult recovery from Covid.

‘China out of all the emerging markets has been the most depressed [this year] due to geopolitical overhang, a tough time emerging from the Covid-19 pandemic and demographics.

‘In general supply chains have been starting to move out of China. The Chinese property bubble has also burst, and this has depressed parts of economy. China remains competitive, and it is still a very competent manufacturing location,’ adds Sehgal.

EMERGING OPPORTUNITIES

These enduring strengths suggest China is far from ‘down and out’ just yet on the global stage but when it comes to really compelling opportunities Sehgal is quick to point to countries like South Korea and India.

In September South Korea announced that it will allow offshore companies to apply for the right to trade in the local currency. This has been viewed by analysts as another step in the right direction for Korean securities and their ambition to be included in MSCI’s developed market indices – Korea is already classed as a developed market by FTSE Russell.

Many of the trusts top 10 holdings are from South Korea including companies such as Samsung Electronics (005930:KRX), Naver Corp (035420:KRX), LG Corp (003550:KRX) and Samsung Life Insurance (032830:KRX).

When it comes to India, Sehgal highlights several burgeoning internet companies which have attracted a younger part of the Indian population. Recent additions to the portfolio include Zomato (ZOMATO:NSE) and PolicyBazaar (POLICYBZR:NSE).

The food delivery company Zomato recently reported its second straight quarterly profit of $4.3 million or 360 million rupees for the second quarter ending 30 September beating analysts’ expectations of a loss 201.7 million rupees.

The food delivery company launched its IPO in July 2021 and opened at a 52.6% premium over the IPO price but has since lost momentum.

‘Despite being shunned by the markets for their high valuations we took these companies on due to their high-quality entrepreneurship,’ Sehgal says.

One of the trust’s largest holdings is Indian bank ICICI Bank (ICICIBANK:NSE) (5.54% of the portfolio) which participates in a range of banking and financial services including commercial banking and treasury operations. Year-on-year ICICI Bank grew its revenues 18.2% while net income improved 35%. Year-to-date the company’s shares have risen a modest 3%.

THE THREE ‘S’S’

When it comes to stock selection Sehgal says the team focus ‘on structural trends, sustainable earnings power and stewardship’.

An example of how the investment managers employ this method is provided by a stock like Taiwan Semiconductor Manufacturing Company (2330:TPE) which plays into clear structural trends.

Sehgal says: We invest in semiconductors as they have become increasingly part of our everyday lives. Whether it is smaller gadgets, autonomous driving, iPhones, iPads,  air pods to smart watches. We have a company like Taiwan Semiconductor Manufacturing Company which has become a world leader not just an emerging markets leader.’

Year-to-date the stock has risen over 33% to sit around the $98 mark. It is the trust’s top holding at 10.2%.

LONG-TERM PERFORMANCE

The trust’s strategy has helped to deliver strong annualised returns. Over one year the trust’s share price has beaten its benchmark – the MSCI Emerging Markets Index – returning 12% versus 5.6%. Over five years the trust’s share price has delivered 4.13% on an annualised performance basis versus its benchmark’s 3.04%.

Sehgal says: ‘Our performance in 2022 was abnormal as we had exposure to Russia, so the trust’s performance suffered because of this. Our success is mostly due to our stock selection, of mostly local companies, and we have analysts producing ideas feeding into our portfolio. We also do not restrict our portfolio choices to just a few companies. We look to profitable companies, growth companies with favourable valuations.’

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here

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