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GAM Talks: How are you navigating current market conditions?

We asked a group of our fund managers a series of questions regarding their respective asset classes. This third and final video considers how our managers are currently navigating emerging market equities, luxury brands, local emerging market debt, Japanese equities and European value equities.

11 October 2018

Part 3: How are you navigating current market conditions?

Tim Love on Emerging Market Equity

The answer to that question is to keep your philosophy at all costs. At a time like this, when markets are at their lows, you need to identify your quality stocks, wait for them to cheapen, make sure they're in the best credit investment grade and they have the characteristics of positive free cash. If you stick to this process and philosophy it would lead you, in our view, towards countries such as Mexico – which has been disproportionately hit ahead of the inauguration of its new president in January (sic December 2018) – and Brazil, another country which has been disproportionately impacted by a string of corruption issues, ie the Car Wash scandal, and also its own election, where the second round takes place later in October. Both of these are a great opportunity to buy quality, cheaply in our view. Another area which is remarkably cheap relative to history and to the developed world, in our opinion, is the China A-share market. It is important to be very specific on “where, which and why”, but we believe this universe has suffered disproportionately, because of various issues including corporate governance and the domestic currency, the renminbi, having fallen over 10% since Q1. In comparison, the Hong Kong-listed China stocks have not fallen because the Hong Kong dollar is pegged to the US dollar, and as such the renminbi based “A” shares are offering a selectively more attractive entrance point at present. With regard to the frontier universe, which has a little bit more risk and a little less liquidity, we favour Vietnam and Romania. These look attractive not only because they are good credit risk, but also they have very good fundamentals, solid free cash flow and high-quality companies that are growing well (with less negative ESG scores). Overall we believe these offer a tremendous opportunity as soon as this risk-on move comes from the global sphere. Areas I would tend to underweight at present would be Turkey, Indonesia and South Africa - all of whose fundamentals are being challenged and tested at this juncture. However, they do offer some tremendous quality stocks, but at the moment the top-down overlay is a challenge.

Scilla Huang Sun on Luxury Brands

I've been investing in luxury stocks for almost 20 years now and I think we have done quite well by sticking to one principle, namely concentrating on brands that are authentic, innovative and can win market share in good and bad times. I think there are two current topics that are key for luxury companies. Number one is millennials. I think luxury brands need to be able to attract the millennials as they are becoming more and more important – now representing 30% and moving to 50% when the baby boomers retire. The second topic is digitalisation. I think luxury brand today need to be on top of the digital trend and need to offer omni-channel optionality to their consumers.

Paul McNamara on Local Emerging Market Debt

Current market conditions have been difficult because of the strong US dollar. We have managed to avoid Turkey and I think staying out of the economies which are regarded as being most vulnerable will be a very important strategy going forward. On the other hand, there have been markets we think have been unjustly punished – such as Indonesia and South Africa. I think catching the opportunities that have been opened up by market turbulence, by taking advantage of investors being too pessimistic about a world that really doesn't look too bad, is a good way of positioning ourselves in emerging markets going forward.

Ernst Glanzmann on Japanese equity

I try to keep my emotions out of things as much as I can and base my investment process on depth, trust and patience. I try to concentrate on businesses from a shareholder perspective and to have a relationship with the management teams and the factory floor visits in order to build further trust in the companies in which we are investing. This means I will be able to better understand the risks involved in the businesses I am investing in regardless of the environment in which we are operating; hence this makes me more comfortable about investing in a particular stock. I think another important element is that I try to narrow my focus to successful businesses, which are growing solidly and which have strong financial balance sheets. This helps me to weather whatever negative situations we find ourselves in.

Hans Ulrich Jost on European Equity Value

Historically when there have been major systemic crises, like the Lehman Bros collapse and the Euroland crisis in 2011, there was a concentrated recovery across both segments of the market (cyclicals and financials) at the same time. This time around – when the economic cycle had already recovered, but geopolitical worries arose – we have had the unusual scenario of one segment outperforming, while the other underperformed – ie cyclicals outperformed strongly and financials underperformed – and then vice versa. So as a general theme, we have taken money out of the area which had outperformed (cyclicals) and redeployed it into financials and so on. Meanwhile, we have also focused on individual opportunities. Given we are purely bottom-up, everything we do is valuation based and since no one looks at valuations, the overshoot can typically be very big and present us with great opportunities.

 
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The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Allocations and holdings are subject to change.