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Beneath the headlines: three stories that might surprise investors in 2020

Over the past twelve months, the US/China trade dispute has dominated headlines and commanded a considerable slice of the world’s attention. Yet, while any breakthrough would be significant for investors and positive for sentiment in Emerging Markets (EM), we think there are several other areas that could throw up positive surprises...

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Over the past twelve months, the US/China trade dispute has dominated headlines and commanded a considerable slice of the world’s attention. Yet, while any breakthrough would be significant for investors and positive for sentiment in Emerging Markets (EM), we think there are several other areas that could throw up positive surprises in the year ahead, regardless of how the trade negotiations play out.

Let’s start with the banking sector, in particular banks in smaller emerging and frontier markets. In many instances these banks are delivering strong earnings while trading at attractive valuations. What they also boast are business models that combines the strengths of traditional deposit-taking retail banks with fintech-like innovation, allowing them to reach new clients with new products in new ways. This positions them well to benefit from rising financial inclusion, which we see as a significant structural change in these markets. Some of the banks we are referring to, such as KCB in Kenya, and which we highlighted this time last year, have subsequently attracted investor interest. Other companies within this space however remain entirely overlooked – despite solid fundamentals and a positive outlook – and we think there is potential for this to reverse in the coming year.

Another area that could surprise next year is technology, specifically the semiconductor industry. Shares of semiconductor companies on the whole performed well throughout 2019 and there is scope for more of the same in 2020. The reason for our optimism is that we are seeing some significant changes in the end market. We have the advent of 5G telecom networks, which increases the demand for semiconductors, and at the same time you have an industry that has consolidated, meaning leaders have emerged in semiconductor memory, foundry and design, all of which are positioned well to profit from change.

The third surprise to highlight for 2020 would be Mexico. Mexico is a country that is out of favour with EM investors right now, but we think the country has a lot to offer. In fact, valuations in the market are towards the bottom of their historical range, but at the same time, the outlook for Mexico is far better than forecast. The political backdrop is more benign than many feared, and the economy is benefiting from companies choosing to relocate their manufacturing activities to Mexico, as they choose to diversify their operations away from China.

Finally, while not necessarily a surprise, another factor to watch for is a swing in favour towards small and mid-cap companies. In 2018, we held the view that small and mid-cap stocks had been unfairly sold down by investors as the market focused primarily on macroeconomic concerns. In 2019, we saw our patience rewarded as the strong operational results of many of these overlooked companies resulted in a positive share price performance. We anticipate further value to be realised in these off-benchmark, small and mid-cap names, particularly if the market begins to look past geopolitical turmoil and focus on fundamentals.

Overall, we believe that next year we will continue to find a good selection of companies that we believe combine attractive valuations with the potential for strong earnings delivery. Given our bottom-up approach, we find these companies across a wide range of sectors and markets, meaning we can build what we consider to be a fundamentally attractive, yet truly diversified portfolio

Ross Teverson , December 2019

Article also available in : English EN | français FR

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