3 Emerging Markets Stock Picks

VIDEO: Morningstar Fund Manager of the Year Award winner Austin Forey picks three stocks from his portfolio

Holly Black 14 September, 2021 | 9:49AM
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Holly Black: Welcome to Morningstar's "3 Stock Picks". I'm Holly Black. With me is Austin Forey he's manager of the JPMorgan Emerging Markets Fund. Hello.

Austin Forey: Good morning. 

Black: So you've got three stocks for us today with an emerging markets theme, unsurprisingly, where should we start?

Forey: So I'm going to give you first of all, a company called Weg. It's a manufacturing company, it's Brazilian unusual to find a really successful manufacturing company in Latin America. And they make electric motors. And in fact, about to celebrate their 50th anniversary later this year, so it has been going a long time. It's a big global player. It's got factories in four continents, I think, and it sells all over the world. And we like the company, I guess, for two reasons. Firstly, really sort of serious corporate culture, very good focus on the way that executives get remunerated and incentivized. Big focus on value creation, and rather Germanic culture in the organisation, which may sound strange, but actually, one of the founders was from German descent. So it's a bit like a German company transplanted to somewhere more tropical with better weather. So that's the first stock. And then the other reason I should say that we like it is electric motors are a big natural indirect beneficiary of the whole drive towards decarbonisation. So you'll see more and more electric motors in a wide range of applications. And that plays straight into the core of what of Weg produces 

Black: And as you say it sells all over the world. That's quite unusual for a Brazilian company, I tend to think of them as being more domestically orientated. 

Forey: Yeah, I mean, it manufactures products, motors, other electrical components. And, that's a global marketplace. So it has to compete head on with companies like Edison from the U.S. and Schneider from Germany. And I think one of the nice things about export companies in general is they have to be good enough, because nobody needs to buy your products if they're not good enough. So it raises the bar and Weg's done a great job over a long time, not just in domestic in Brazil, but exporting and growing elsewhere too. 

Black: And what's stock number two. 

Forey: Okay. So stock number two is a business called Guangzhou Kingmed Diagnostics. And as the name suggests, it provides diagnostic testing services for healthcare in China, which is where the company is from. And just to give you a little explanation on that, if you go and have a blood test, or some kind of other medical test done in a hospital in the West that test will probably be sent to a third party laboratory for the actual test to be conducted. So it's an outsourced service. In China, most of those tests are still done in house in the hospitals, which means they have less volume, it's more expensive, it's less efficient, and so on. But what you're seeing is the rise of an outsourced service business model there. In exactly the same way that's happened in the U.S. and in Europe. And I think there's a very long runway for growth because of that. And so that's a nice illustration of what's going on in China, where the service industry has really taken over as one of the drivers of economic growth. And these kind of niche specialist companies can sometimes have an extremely bright future ahead of them. 

Black: Okay, and what is our final stock? 

Forey: Our final stock is called United Breweries. You can't get that far along with beer companies and United Breweries is the leading beer company in India. 50% market share owns the Kingfisher beer brand, which may be familiar to some people. And I'd like to talk about the stock for two reasons. Firstly, it gets a good illustration of patience, and how you need to think about what really matters, and what's actually not that important. You know, we bought the stock originally 10 years ago, 11 years ago, in fact, and the chief executive was a notorious playboy. He was the son of the founder, he was running the business extremely badly, but the basic asset was exceptionally valuable. And it's really rare to find a consumer branded company with 50% share of a really underdeveloped market. And the long and the short of it is he eventually over leveraged himself, lost control of the company it's now a subsidiary of Heineken. So the western multinationals have come in, the governance has changed, the operating standards have changed. And that's a business that is just far too small in the long run for the opportunity that's in front of it. So we think it has many decades of growth ahead of it. And that's the kind of thing we're looking for. 

Black: And this is beer, big money in India, I tend to think it's growing in a lot of emerging markets, but you don't hear about it so much in India. 

Forey: Beer is a difficult industry in India, you know, there's no point denying it. And I think there's two reasons for that. Firstly, it's not as socially embedded as perhaps it is in countries like the U.K. You know, when we bought the stock, there were as many licenced outlets in the whole of India for 1 billion plus population, as there were in London, that may be telling something. 

Black: A lot in London. 

Forey: …British too, but I think that what you see is a desire for leisure and having fun with your friends and going out to bars. So the kind of things that eventually lead to much more consumption are probably in place, the regulation will probably need to change a little bit over time. But originally we paid $1 billion market cap for the company. And that's just tiny when you think of how much of the global population you're covering with that kind of footprint. 

Black: Austin, thank you so much for your time. 

Forey: You're welcome. 

Black: For 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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