Emerging markets
04 Dec 2018 | By Nick Payne

Discovering treasure in emerging markets

Nick Payne explains how to look through market pricing to discern real value, and reveals some precious jewels.

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Long-term investors know a simple secret: there is a difference between market price and intrinsic value. Investing for the long term requires the ability to distinguish between the vicissitudes of markets, which can be as mercurial as the sea, and the firmer ground of corporate fundamentals, which are a sounder guide to companies’ real value and future prospects. We seek out firms that have a sustainably high return on invested capital (ROIC), and an economic moat protecting those returns for the future. But that is only one half of the equation. The other is to buy shares in such companies when they are trading at the right price.

Markets are often swayed, not by fundamentals, but by fear. “Red October” 2018 is a case in point. When markets are retreating, an opportunity is given to investors who have studied corporate fundamentals and who have conviction. Like tempestuous seas that cast treasure chests upon the shore, fearful markets tend to offer up sound companies at excessively low prices.

We do not believe in the efficient markets hypothesis, an academic theory that claims, in essence, that all information is already in the price, and that all market prices are fair. We believe that market prices are often far from the intrinsic value of companies. Markets are driven in part by human behaviour, which is often less than rational and subject to psychological biases. And some markets are less efficient than others. Emerging markets, we contend, are less efficient than those in the US, and can be more volatile than their developed market counterparts. In our view, this gives greater opportunities to investors armed with a firm grip on company fundamentals, and some healthy common sense about market pricing, to invest for the long term in good companies at low prices. Such companies can be jewels in portfolios.  


Estacio is a Brazilian education firm that is gaining market share from a low base. This will allow more optimal cost dilution and better pricing to students. Enrolments for distance learning should continue to increase, given Brazil’s unemployment rate of 12% (as at September 2018) which is expected to improve.


Tencent is the dominant internet company in China across gaming and social media, with a deeply entrenched economic moat due to the “network effect”. Tencent has not even begun to fully monetise its platform, compared to Western peers. Tencent has now doubled the ads it shows to two per day per person, compared to Facebook’s 20: ample room to grow profits!


Chinese fashion retailer JNBY is benefiting from rising incomes and increasingly sophisticated tastes. Just Naturally Be Yourself appeals to the desire for increased individuality and uniqueness. The company has little competition and delivers ROIC of above 40%.


Indonesian department store operator Matahari has more than 40% market share, working with loyal global brand partners. It is developing its own private brand sales and has entrenched distribution channels. Our proprietary valuation indicates over 100% potential upside to the share price at the end of October 2018.

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