Emerging Markets Growth Investing: Is Now the Right Time?

January 28, 2022
John Ewart emerging markets Investment Manager at Aubrey Capital Management

John Ewart, Investment Manager, Aubrey Capital Management

In this 3,821 word interview, John Ewart, an Investment Manager at Aubrey Capital Management details his belief in the emerging markets growth stocks of India, Singapore, China and Indonesia.

Mr. Ewart is a Co-Manager for the Aubrey Global Emerging Markets portfolio and joined Aubrey in 2012. He is an Economics graduate from Strathclyde University and member of the CFA Institute.

Mr. Ewart began his career with Glasgow-based FS Assurance in 1988, and managed European equity portfolios in the U.K. retail and pension fund market.

In 2000 Mr. Ewart joined First State Investments to manage the pan European retail and segregated client portfolios. In 2004 Mr. Ewart moved to Alliance Trust PLC and subsequently managed a U.K. specialist portfolio, before proceeding to manage a Global Equity portfolio, and latterly the Global Emerging Markets portfolio.

“We’re very focused on growth. And when we say growth, we mean cash flow growth.

We look for companies that generate specific metrics, notably a return on equity in excess of 15%, cash flow return on assets of 15%, and ultimately profit growth of 15%. These are not easy parameters to meet.

If you look at the MSCI Emerging Markets Index, that index has struggled to achieve a return on equity of 15% over the last 10 years and has done so very briefly.

We hold excellent businesses with the level of profitability that enables them to reinvest in their expansion and further capitalize on that growth opportunity. So our focus is very much on growth investing.

But the valuation of those stocks in the portfolio is also clearly a key parameter.

In terms of regions, our biggest exposure at the moment is to India, where we have over 40% of the portfolio. You may think that’s a high figure, but we’re very much in the camp of being active managers.

We have our own analysis and that guides our stock positions.

There are many stocks within the index that we do not buy for our clients.

Many are heavily influenced and some are dominated by various governments in different parts of the world. Some carry risk in areas where there are industries in decline, delivering poor returns, or having limited growth prospects.

And we think that consumer-focused opportunity is, in many ways, the area where we can see the prospect for enterprise and successful business continuing to expand and providing greater areas of opportunity as we go forward.”

India has lagged China in respect to COVID 19 pandemic recovery.

“By contrast, what was seen in India was a bit chaotic.

And India is now considered to be going through this third wave of COVID. The first wave really impacted the poorer segments of the society, particularly those that live in urban, dense areas.

When the government basically decided that they were closing the economy, a lot of these people had to leave because they didn’t have access to employment, therefore they couldn’t afford to live in the urban areas they were in.

That was a humanitarian disaster, because you had individuals trying to walk literally hundreds of miles back to their villages. India learned a lot — learned a hard lesson from that.

The second wave of COVID in India really affected more of the middle class. And what you found was a lot of people confined themselves to their homes for safety reasons.

You also then found the adoption of various behaviors, and sectors such as food delivery being very popular. Again, we’ve seen that in countries such as China during the whole COVID experience at the outset.

We start to see this repeat of consumer behavior in different countries when similar situations arise. And even when individuals have the option of being allowed to go out and visit restaurants post the COVID waves that we’ve had, there is still a reluctance, there is still a hesitation.

So the adoption of food delivery has actually become much more almost mainstream in people’s behaviors. And certainly, there’s been a lot of evidence in China and in India that this sort of change in consumer behavior is here to stay. Not just a temporary phenomenon because of COVID.”

An emerging market faces challenges idiosyncratic to it’s own specific government and region:

“…If you consider the prospects in countries such as South Africa, Mexico or Turkey, it’s very difficult for the consumer to feel optimistic, because the outlook politically remains challenged.

The outlook for economic growth has been very difficult for a number of years.

And quite simply, if the consumer doesn’t feel optimistic about their employment prospects, their income growth, then they will not spend to the same extent. So, whilst we’re broadly optimistic, it’s very country specific and is very focused on the consumer itself.

One of the biggest challenges at the moment is the negative sentiment toward China as a country, as an investment destination — less because of the outlook for the consumer, which we continue to think of as optimistic with economic growth, inflation under control, increases in wages and salaries for those that are employed in China — but because the government really has made a virtue of its Common Prosperity program.

We think a lot of corporates are wary of not conforming with that and have to be seen to conform with those government aspirations. Consequently, we’re seeing a lot more expenditure on areas which are being encouraged by the government.

But many companies are of the view that they have to be seen to be the good corporate citizens, otherwise they possibly incur the wrath or the disappointment of the government. That type of government intervention is not always welcome.

And despite the fact we can understand the greater aims of the government in China, we think there are other ways to achieve those aims, rather than squeezing the corporate sector.

Interestingly, there has been recent evidence of local government in China attempting to squeeze payments from small, local entrepreneurs to offset their reduced income from land sales, and this has resulted in push back, which is encouraging.”

The stock markets in emerging markets, especially growth stocks, offer a stock picker’s advantage over index investing.

“I would highlight is that when you look at emerging markets over the last 10 years, the actual growth in the index, the MSCI Emerging Markets Index, has not been that spectacular.

And for a lot of global investors who sit in America, they look at the returns they’ve received from the U.S. indices and think, “Why should we bother with these emerging markets?”

Although there’s the prospect of political strife in China, maybe the prospect of currency concerns in Turkey, the point that we would make is that there are strong structural drivers which present investors an opportunity to invest in good businesses, genuinely good businesses.

And they have been established and run by successful entrepreneurs. And they’re providing good services that a huge population wishes to participate in.

So the strategy that we have adopted, and that we have ingrained within our philosophy, has resulted in very significant returns, comfortably ahead of the returns from the index.

These are significant returns which have provided a benefit to our clients, including our clients in the U.S. who have recognized the longer-term structural growth opportunities that we discuss with them.

So please look beyond the index and look at the actual active fund managers who are identifying these themes, investing in good companies and delivering alpha.”

Get the specific stock suggestions and more detailed analysis be reading the entire 3,821 word interview with John Ewart, Investment Manager at Aubrey Capital Management, exclusively in the Wall Street Transcript.

John Ewart, Investment Manager

Aubrey Capital Management


email: clientservices@aubreycm.co.uk