3 Emerging Markets Stock Picks

VIDEO: Nordea Emerging Star Equity Fund manager Juliana Hansveden looks at software, insurance and EV batteries in her three stock picks

Holly Black 28 July, 2021 | 1:05PM
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Holly Black: Welcome to Morningstar "3 Stock Picks". I'm Holly Black. With me is Juliana Hansveden, and she's manager of the Nordea Emerging Stars Equity Fund. Hello.

Juliana Hansveden: Hello.

Black: So you've got three stocks for us from the portfolio, where would you like to start?

Hansveden: I'd like to start with Kingdee (KDIC). Kingdee is a Chinese software-as-a-service company. And it's actually a leader in this nascent segment. So it's focusing on software that is subscription based, rather than software that you buy and download onto your computer or your servers. And this, of course, goes for companies primarily targeting enterprises.

Black: And why is this a growing way for tech companies to do their business as sort of subscription model?

Hansveden: It is more convenient, and it allows employees working for the company to access the software from anywhere. And that was particularly relevant during the pandemic or still is, but it's a trend in a structural growth area that that started even before the pandemic, because in addition to the convenience, it is also more cost effective for the company. It doesn't have to spend that much upfront, but instead it has this annual subscription that it pays.

Black: Okay. What's stock number two?

Hansveden: Stock number two is AIA (01299), the Asian insurance company.

Black: And what do you like about AIA?

Hansveden: So AIA has one of the most efficient salesforces or agency forces in Asia, and it is targeting the high end of the market, which is significantly under penetrated, and actually all of it is significantly under penetrated in China, because I'm going to focus on China here as the growth opportunity for AIA. And the combination of them being very efficient in selling, having a unique proposition. And also the fact that China is opening up because historically, foreign life insurance companies weren't allowed to sell policies in Mainland China. But that is changing. So they're gradually gaining more and more access to the mainland market. And that is one of the things that is driving their growth.

Black: And something we hear about insurance companies in emerging markets is that as the population gets richer, the demand for insurance increases. Why is that?

Hansveden: It is because actually the welfare systems aren't as developed in Asia and in China. If we focus on China in particular, there is less safety in, for example, knowing that you get access to high quality health care, or that you will be covered by a government pension, once you retire. There's actually very limited certainty. And therefore you need to yourself save for the future, and to make sure that your family is covered as well. So this is what drives the demand for life insurance. And as household incomes rise, increasingly, they can afford this sort of thing and they can afford to think about the future.

Black: Okay, what's our final stock?

Hansveden: The final stock is Samsung SDI (006400), the EV battery maker that is based in South Korea.

Black: And I suppose I don't need to ask about what's driving this trend.

Hansveden: Right. Yeah, I think most most people will be familiar with what's going on there. Well, we just think that Samsung SDI is one of the few companies globally that can make high quality EV batteries at scale. And demand is quite obvious in the sense that the car OEMs are gradually phasing out their traditional vehicles, and they are launching a combination of hybrid and pure EVs. And that is only going to accelerate in the sense that most of them have set an end year for their ICs when they will stop selling the internal combustion engines and move entirely to hybrids or EVs. And that is a huge growth driver clearly. So here, it's more about being able to make the batteries in a safe way, have the right technology and do it at scale. And we believe Samsung SDI can achieve that.

Black: And something I always wonder with these battery companies is the ESG credentials because obviously great for electric cars, but it still involves mining of commodity.

Hansveden: Absolutely. And that is a clear issue. Cobalt is one of the raw materials needed to make EV batteries and cobalt is mined in places like the Democratic Republic of Congo in Africa, which has human rights issues. So this is something we're engaging with the company on and we are seeing improvements but I would say over time, the goal of the company is to phase out their dependence on these controversial materials because it is difficult for them to entirely know where each -- where all of the cobalt is coming from, although they made a lot of progress in understanding their supply chain. So it's about technological development and reducing their reliance on some of these materials.

Black: Juliana, thank you so much for your time. From Morningstar I'm Holly Black.

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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Holly Black  is Senior Editor, Morningstar.co.uk


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