3 Emerging Market Stocks for Long-term Growth

Looking for long-term holdings? These three emerging market stocks picked by Carmignac's Xavier Hovasse offer bold investors the opportunity for growth

Emma Wall 7 April, 2016 | 4:31PM
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Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Xavier Hovasse, Manager of the Carmignac Emergents Fund.

Hello.

Xavier Hovasse: Hello, Emma.

Wall: So, what's the first stock you'd like to highlight today?

Hovasse: The first stock I'd like to highlight is MercadoLibre (MELI). It's the eBay of Latin America. So, they are the e-commerce leader in every single Latin American country. Amazon has no operations in Latin America. eBay has no operations in Latin America. The Chinese Alibaba are also absent from Latin America. So, these guys, MercadoLibre, are the leader everywhere. They are the leading marketplace and they are a phenomenal company.

They have a strong balance sheet. They have a net cash balance sheet because they have a very capital-light business model. They generate already a lot of earnings and cash flow and also, they are a takeover target. I mean, if Amazon one day wants to go to Latin America, Amazon's market cap is, what, $250 billion, something like that. MercadoLibre is worth $5 billion. It's very easy for Amazon to buy them. It's more convenient than trying to start an operation from scratch in all of those countries.

Also, the political and economic momentum in Latin America is very good. Particularly, in Argentina, they had a presidential election last year and the winner, Mauricio Macri, is very good. So, the economy in Argentina should do very well. And in Brazil, Dilma is about to be impeached; it's not completely certain, but it's very likely that she is going to be impeached and that will be very positive for Brazil. So, you've got a good top-down environment and the company itself is very good.

Wall: And of course, eBay owns a part of that company already, doesn't it? So, you've got the backing there of the giants within industry.

Hovasse: Yes, they own 18% of the company and they could buy the entire company at one stage as well. So, they are one of the potential buyers as well. So, it's a takeover target obviously.

Wall: And what's the second stock today?

Hovasse: I'd like to talk about Zhengzhou Yutong Bus (600066), which is a Chinese manufacturer of buses. It's a very good company. So, they are the largest bus manufacturer in the world now. They have roughly a third of the market share in China. So, it's a very good company. Again, it's very capital-light. It has a net cash balance sheet as well. I think 20% of the market cap now is net cash. And they have a free cash flow yield of 7%.

But also these companies are growing because you will assume that selling busses in China does not have a lot of growth. In fact, it does have a lot of growth. Because of the pollution issues the Chinese government is now forcing municipalities to buy EV, electronic buses, and they are the largest manufacturer of EV buses in China and the margins are very high and therefore, you know that there is going to be a lot growth.

The replacement cycle is also very short actually for buses and buses are very convenient for EVs. The reason why it's difficult to buy a car is because you don't know where the charging stations are going to be and you don't know the autonomy. For the buses, it's very convenient because they use the same route every day and you know exactly how many miles they are going to drive.

Wall: It's always going to have the backing of the government on side as well?

Hovasse: Exactly.

Wall: And what's the third and final stock?

Hovasse: I'd like to talk about ICICI Bank (532174) in India. So, it's more a turnaround story that the bank hasn't done very well. But first of all, in India the banking penetration is quite low, so the household debt and corporate debt as a share of GDP is very low. It's much lower than the average of emerging markets. You have a proper long-term growth story ahead for the entire banking sector and private banks are very well run.

ICICI has a very good insurance business. And they have been in trouble because they have exposure to the steel sector which is completely distressed in India. So, we've been there. We've travelled there with a team, with David Park and Matthew Williams who are our financial analysts. We've done a lot of work and we've made our calculations and if we make the proper adjustments, this is a bank trading on 1.2 times book value, so it's very, very cheap. There is a very strong valuation argument. As you know, India is our largest country. We like a lot this country. We invest a lot in India. But sometimes stocks are very expensive and this is a very good opportunity.

Wall: Xavier, thank you very much.

Hovasse: Thank you very much.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Carmignac Emergents A EUR Acc1,246.96 EUR1.67Rating
ICICI Bank Ltd809.95 INR0.00
MercadoLibre Inc1,091.31 USD0.00Rating
Yutong Bus Co Ltd10.80 CNY0.00Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar