Investors ‘extraordinarily complacent’ about EM macro risks – but stock alpha opportunities abound, says Man GLG’s Swan

by | Jan 20, 2022

Investors are ‘extraordinarily complacent’ about the macro risks currently facing emerging markets, but idiosyncratic investment opportunities still abound, says Andrew Swan, manager of the Man GLG Asia (ex Japan) Equity strategy.

Swan, whose long-only strategy launched in October 2020, says investors are failing to grasp the potential for falls across emerging markets in an environment where growth is slowing and central banks in developed economies are beginning tightening cycles amid surging inflation.

“It is very unusual to find a period where inflation is higher in developed markets than emerging markets,” he says. “And that is problematic because it means there is a bias to tightened policy in developed markets at a time when growth is fairly subdued in emerging markets. Strengthening developed market currencies, particularly the US dollar, are really challenging for large parts of EMs. Yet because markets are assuming central bank support will be forthcoming in EMs, there is this extraordinary complacency among investors who continue to take on significant market risk.

“They fail to appreciate that, while there may be some easing to cushion the fall, a country like China, under its new Common Prosperity policy, is not likely to step in to stimulate growth in our view.”

Swan says investment opportunities can still be found in those parts of EMs beginning to recover from COVID disruption, like Southeast Asia and India. But he says opportunities can also still be found in China, where some state-promoted industries are thriving.

“The adoption of technology in China is always fast and we’re seeing incredible acceleration in the penetration rates of electric vehicles there, helped by investment from the government, which is critical,” he says.

“It’s particularly interesting that it’s now the domestic companies that are doing better than the international brands. The Chinese companies are very competitive, if not better, and they’re operating within a regulatory framework which they understand better than international rivals. This is an underappreciated story and it runs through the whole supply chain from the battery makers to the EV companies themselves.”

Stocks Swan owns in the portfolio include Wuxi Lead, which manufacturers lithium battery equipment, and EV manufacturer XPeng. “It is selling everything it can produce because the technology is customised to the Chinese market and its local tastes,” says Swan. “Plus it knows how to operate in the regulatory environment – it is a company growing extremely quickly and we believe it will continue to do so as chip shortages ease.”

Outside China, Swan says he sees a number of exciting uncorrelated stock alpha opportunities, including Bharti Airtel, an Indian telecommunications company. “The mobile sector in India was very high growth but hit some challenges and has now consolidated down to three players, one of which is struggling,” he says. “With fewer players, prices for mobile services are starting to rise again and Bharti Airtel is beginning to see a very strong recovery after a downturn in profitability. This is another exciting idiosyncratic opportunity that has nothing to do with the economy or what is happening with central banks around the world.”

Another key opportunity Swan cites is real estate in Hong Kong, where offices are beginning to recover quickly post COVID. “People assume commercial office space is very challenged globally because of the pandemic but that’s not necessarily the case everywhere,” he says.

“Residential apartments in Hong Kong are generally small and workers are finding it hard to function properly from home. There is no real alternative to going back to the office and people are doing that and filling up space quickly as a result. We hold Hongkong Land, which owns a premium office in central Hong Kong, and Wharf Real Estate Investment Company, which owns high-end shopping centres.”

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