“Emerging markets is almost two-thirds of the world’s population,” Patel says. “It’s about half of the world’s GDP. And yet it’s only about one-sixth of the market cap of the world. And that really is the opportunity to invest.” These economies are growing at a faster pace, have younger populations and rising per capita GDPs. “And that is going to give rise to large, growing profit pools for our companies to benefit from. Essentially selling production services to this growing middle class.” The BMO fund is overweight in India and Mexico. “We don’t look at the index at all.” Most investors chase companies based in the emerging markets, rather than companies that sell to the emerging markets, he says.
“In sharp, rising markets … typically our strategy tends to lag. But having said that this year we have been able to keep pace with the index, and this despite the fact that we do not own any of the Asian IT or technology stocks which have gone up substantially in 2017.”
The firm did find itself taking money out of certain investments in 2017, he says, because the rally caused many of those companies to hit their valuation goalposts sooner than expected. He points to the advantages he sees in countries like Mexico. Some investors thought it might be a victim of Donald Trump’s protectionist talk, but that fear has made it a buying opportunity, says Patel.
He points to Walmart in Mexico, which is called Walmex. “Walmex is almost 25% of the total retail sales in Mexico. And in terms of profit and cash flows they are almost 70% of the market. So it’s a dominant company in an emerging market which is right next door to the largest market in the world. … You have a Western brand, Western management, Western corporate governance, operating in an emerging market.” The fund bought the company around the time of the U.S. presidential election when share prices dropped on fears of protectionist talk. Patel says the opportunity was “like a Black Friday sale.”
He has also liked Yum China, an offshoot of Yum! Brands. The theme is similar: a Western brand with Western corporate governance selling mainly to an emerging middle class in China. “This is the largest fast-food chain company in China. They [have] about seven and a half thousand stores. They have been operating in China for 20 years.”
At the end of the day, says Robert Marshall-Lee, the case for emerging markets is obvious. “The demographics are as clear as day,” he says. “It’s the most predictable economics you can get.” When you look at the U.N. website, what’s happening in the population of these countries stands in stark contrast to what’s going on in the developed world. “Over the very long term, that is one of the key GDP drivers.”
(Clarification: the print version of this article stated that Robert Marshall-Lee was the manager of the Newton Global Emerging Markets Fund. He is the manager of both that fund and the Dreyfus Global Emerging Markets Fund. The Newton fund is a U.K.-domiciled UCIT fund available only to European Union-based investors. The Dreyfus Global Emerging Markets Fund is the mutual fund available for U.S. advisors and investors.)
Newton Investment Management is the subadvisor for the Dreyfus Corporation, a subsidiary of BNY Mellon Investment Management.