Spotlight - May 2020
In this issue of Spotlight, we consider whether the valuations being offered in emerging markets amount to an attractive long-term opportunity.
So, how are you bearing up? From talking to family, friends and colleagues, it seems that many have reached a turning point in the past couple of weeks.
The novelty of the lockdown has well and truly worn off. What felt surreal at first now feels humdrum – less 28 Days Later, more Groundhog Day. Feelings of frustration, ennui or even depression have started creeping in, even among those like me who are fortunate enough to be healthy, safe and financially secure.
Since my daily life must now be lived within a one-mile radius of my home, it was a real pleasure this week to take a trip to more far-flung regions. Don’t worry, I haven’t been jetting off anywhere – my travel was purely virtual, courtesy of an AIC press call with three emerging markets managers.
I have always been fascinated by emerging markets – I spent three colourful years of my life living in one of them (China) and have always believed in the long-term investment case. I’m sure it is partly this emotional attachment that has led me to tilt my personal portfolio in the direction of faster-growing regions, though it hasn’t always been a decision that has enhanced my returns. In the current crisis, for example, emerging markets endured both a more devastating hit in March, and a feebler recovery in April (see chart).
Source: AIC/Morningstar (share price total return)
If I was wavering in my faith, however, it was restored by listening to Andrew Ness, Mario Solari and Ross Teverson, the respective managers or co-managers of Templeton Emerging Markets, Genesis Emerging Markets and Jupiter Emerging and Frontier Income.
Andrew began his emerging markets career during the ‘tequila crisis’ of 1994, but he admitted he had never experienced anything like the current pandemic. While he believes it’s “extremely premature to talk about any shape of recovery – V, U, W or any of the alphabet soup” he doesn’t think we’re in the cusp of a major depression either, with global stimulus measures going way beyond what we saw in the financial crisis.
All of the managers agreed that the responses of many emerging countries to the pandemic were encouraging, with Mario stating that “of the countries coping well with COVID, a large proportion are in emerging markets”. Andrew pointed to China and Northern Asian countries being better prepared for the crisis than even some developed nations.
Ross has seen pressure on some companies to cut dividends, including in the banking sector, but added that many in his portfolio are continuing to pay them and some will even be increasing them. “The dividend picture is better than people might expect,” he argued, pointing out that emerging market companies generally have lower leverage as well as strong underlying growth drivers supporting income payments.
Then there is the question of valuations. According to Andrew, valuations of emerging market equities represent a 35% discount to developed market valuations – there always is a discount, but this is unusually high by historical standards. It is worth adding that investment company investors can capture additional value, with the AIC Global Emerging Markets sector now standing at a 12% discount to NAV compared to 1% for the Global sector.
None of this makes emerging markets a one-way bet. I received through the post today an emergency appeal from a charity I support, pointing out that the impact of COVID-19 on poorer regions of the world could be catastrophic. While some of these are not what we would class as ‘emerging’ or even ‘frontier’ markets, coronavirus could cause humanitarian crises with significant spillover effects.
Despite these alarming prospects, I am still happy with my portfolio’s exposure to emerging and frontier markets. Demographics are about the closest we get to certainty in the investment world, and these strongly favour developing regions, providing a favourable backdrop for many dominant and innovative companies. So I’m with Andrew, Mario and Ross (and Ian Cowie) in their belief that emerging markets will bounce back, though I have no idea when.
The COVID pandemic has been devastating for swathes of businesses, but at the AIC we have been investigating two sectors that are booming: food delivery and gaming. Both have benefitted from the increased time we are spending sitting on our bums at home. We have commentary from investment companies including Scottish Mortgage, Allianz Technology, Lindsell Train and Standard Life UK Smaller Companies.
We have been making progress in preparing a programme of AIC webinars, and will be emailing you shortly with dates for these. If you aren’t signed up to receive emails about training, or aren’t sure whether you are, you can make sure you receive this by dropping an email to Debra Gibbons.
Till next time, best of luck enduring your own personal Groundhog Days.
Nick Britton, Head of Intermediary Communications, AIC
Emerging markets take on COVID-19
Whilst there are encouraging signs of a return to normal business activity in some emerging markets, others are still seeing coronavirus cases and deaths rise from day to day. As in developed markets, the long-term impacts on emerging economies remain uncertain.
Investment companies in the Global Emerging Markets sector have reflected these mixed fortunes, with the average company bouncing back 7% in April, after losses of 15% the previous month. For investors prepared to take a long-term view, could current valuations provide an attractive entry point?
At a media webinar hosted by the AIC, Andrew Ness, Portfolio Manager of Templeton Emerging Markets Investment Trust, Mario Solari, Portfolio Manager of Genesis Emerging Markets Fund, and Ross Teverson, Co-Manager of Jupiter Emerging & Frontier Income Trust, discussed how they are dealing with the impact of coronavirus and their outlook for emerging and frontier markets.
Their views have been collated alongside comments from Michael O’Brien, Manager of Fundsmith Emerging Equities Trust and Austin Forey, Manager of JPMorgan Emerging Markets Investment Trust.
COVID-19 – China holding up better
Ross Teverson, Co-Manager of Jupiter Emerging & Frontier Income, said: “Going into 2020, we remained focussed on identifying those companies which in our view are exposed to specific or structural positive change that is underappreciated by the market. As a result of our fundamental stock picking process, we have consistently been underweight China, favouring higher conviction ideas in overlooked markets, including Turkey, Mexico and Russia.
“Though the COVID-19 outbreak originated in China, the Chinese market has surprisingly held up better than the rest of emerging markets and our underweight position has acted as a headwind for us, as has our higher allocation to smaller companies. We have not significantly altered positions within the portfolio, as we believe that the long-term investment case for our holdings remains intact and that the companies in which we invest are well positioned to weather the economic impact of coronavirus.”
Mario Solari, Portfolio Manager of Genesis Emerging Markets, said: “Our China domestic A-share investments have been among the most resilient year-to-date. There seem to be several reasons for this. One is fundamental; China appears to have successfully controlled the number of new COVID-19 infections, even while releasing restrictive measures. Buoyed by this containment success, many management teams we have spoken to are optimistic about a ‘V-shaped’ recovery, especially in the second half of the year.
“That said, a key next question is the degree to which falling global demand for manufactured exports will undermine hopes for a rapid economic rebound in countries like China, Korea and Taiwan.”
Andrew Ness, Portfolio Manager of Templeton Emerging Markets, said: “At a time when coronavirus-driven country shutdowns have exacerbated investor concerns, the crisis hasn’t altered our investment philosophy towards emerging market stocks. We continue to favour competitive, well-managed companies with long-term sustainable earnings power and attractive valuations. Our approach has been calm and rational, without panic. Hence, we have not made significant changes to our portfolios on account of the crisis. However, we have reduced or exited some investments in companies where we believe there is a longer-term negative impact on the business or where share prices have not corrected in line with the expected negative impact on the business.”
Opportunities and risks
Mario Solari, Portfolio Manager of Genesis Emerging Markets, said: “We have been busy reassessing the range of outcomes for our portfolio holdings. Some portfolio holdings have benefitted from social distancing. NetEase, for example, a leader in the Chinese video game market, has seen a boost in user engagement, as social distancing and the temporary closure of schools has increased the consumption of digital entertainment. Recent data indicates 60% to 70% of Chinese gamers increased playing time during the outbreak. By contrast, the impact on our Indian bank holdings has been more negative. India has a young population, but a weak public healthcare system, and the country is in near lockdown in most areas. This exacerbates the economic slowdown we have seen in the last couple of years.
“During this period of extreme volatility we have been assessing dislocations between share price moves and underlying fundamentals, taking the opportunity to upgrade the quality profile of the portfolio.”
Ross Teverson, Jupiter Emerging & Frontier Income, and Andrew Ness, Templeton Emerging Markets, discuss how their portfolios are being affected by COVID-19
Austin Forey, Manager of JPMorgan Emerging Markets, said: “At the industry level, e-commerce companies, media content companies including mobile games developers, food retailers and pharmacies are net beneficiaries of the nature of this downturn. On the other side, businesses associated with travel and those reliant on physical stores – restaurants, fashion retail – are under pressure. The sell-off has been pretty indiscriminate; it’s created some opportunities in companies we liked fundamentally but which previously looked expensive, especially in areas like IT services, e-commerce and mobile gaming.”
Ross Teverson, Co-Manager of Jupiter Emerging & Frontier Income, said: “We certainly see longer-term opportunities being created in companies that offer a combination of low valuations and very strong balance sheets – around a third of the portfolio is in companies with net cash on their balance sheets. We see these qualities in companies across a diverse range of sectors and markets, including our holdings within Taiwanese tech, Chinese pharma, Indonesian property and Pakistani autos. Beyond the risks presented by coronavirus, we would highlight political risks in emerging and frontier markets as being significant, yet difficult to forecast.”
Outlook for emerging and frontier markets
Michael O’Brien, Manager of Fundsmith Emerging Equities Trust (FEET), said: “The vast majority of companies in FEET’s portfolio have net cash and resilient business models based on repeat, low-ticket transactions and backed by high barriers to entry. We believe that the businesses in our portfolio are going to continue to benefit from the rise of the emerging market consumer and trends such as formalisation and consolidation. This is something which the crisis will likely accelerate even before economic recovery takes hold at some point later on this year or next year. We would not be surprised if there is greater investor interest in emerging markets once recovery becomes visible given their stronger long-term growth trajectories.”
Mario Solari, Portfolio Manager of Genesis Emerging Markets, said: “Countries that are likely to be relatively better off are those that combine high levels of testing with relatively robust economies and this includes Taiwan and Korea. At the other end are Brazil and South Africa where testing is low and existing budget and current account deficits make it harder to turn on the fiscal taps. We remain bullish on the long-term opportunity in emerging markets. The long-term growth outlook is compelling considering the demographics and income convergence opportunities, and our markets are often inefficiently priced. We believe this is particularly the case today. We seek to identify a diverse group of quality companies and combine them into an attractive portfolio offering good long-term returns.”
Ross Teverson, Co-Manager of Jupiter Emerging & Frontier Income, said: “The current environment presents significant challenges to many emerging and frontier market companies. However, it is also important to recognise that valuations are very low relative to history for many companies and sectors within the asset class. These low valuation levels only ever tend to be reached during periods of greater uncertainty, but it is also the case that they have typically created compelling long-term buying opportunities in emerging and frontier market equities.”
Austin Forey, Manager of JPMorgan Emerging Markets, said: “Current market conditions reinforce that the way we have always invested, focusing on strong balance sheets and large competitive moats, is the right philosophy. We have been careful through this time to re-evaluate all our investments to try to ensure that they meet these high standards, and sales have reflected where we had doubts in this regard. The corporate world is rapidly changing and there will be big winners and losers; for investors in emerging markets, we believe the opportunity set is bigger and more diverse than ever before, particularly in China.”
Andrew Ness, Portfolio Manager of Templeton Emerging Markets, said: “In our view, domestic recovery in north Asia as well as lower oil prices are supportive of a number of emerging markets, but the extent to which stimulus policies can offset demand destruction remains to be seen. Valuations relative to developed markets also look more appealing than they have for some time, although there will be significant volatility in earnings forecasts over coming months. There will be a hit to earnings in Q1 for most businesses and most likely Q2 due to supply shocks and weaker demand activity globally. Although we expect some normalisation in the second half of 2020, we can’t rule out a delayed recovery should there be a more prolonged and severe global recession.”
Saturday night takeaway
The implications of a surge in demand for food delivery companies during lockdown
For over a month, the UK’s cafés, pubs and restaurants have been shut unless operating takeaway or delivery services. With the country now in its seventh week of lockdown, enjoying a takeaway might have become a rare treat for many within an otherwise repetitive routine.
What effect is lockdown having on takeaway or recipe box businesses, both at home and further afield? The AIC has gathered comments from investment company managers on Just Eat, Uber Eats, Takeaway.com, Deliveroo, Hello Fresh, Meituan Dianping, Grubhub and more.
COVID-19 – “Food delivery has gotten a charge”
Philip Webster, Fund Manager of BMO UK High Income Trust, said: “All things considered, demand has held up reasonably well for both Just Eat and Takeaway.com. Both companies experienced a dip in sales towards the end of March 2020, as consumers began to stockpile supplies and cut back on ordering. However, numbers for April 2020 evidence an uptick in demand for Takeaway.com, highlighting that the demand side is still resilient in such an uncertain trading environment.
“On the supply side, whilst many restaurants have been forced to shut down to cut their overheads, Takeway.com has added over 3,000 new restaurants to the platform since the start of this crisis out of 9,000 applicants. The average spend-per-order has been rising across both companies, which suggests they are handling the current downturn reasonably well.”
Walter Price, Portfolio Manager of Allianz Technology, said: “Food delivery has gotten a charge from stay at home, eat at home. People like variety and they are often bored cooking what they know. But Grubhub has taken the opportunity of increased revenue and earnings to reinvest in its restaurant variety and its delivery network, as Uber Eats and DoorDash are burning money to build these aspects of the business.”
Catharine Flood, Corporate Strategy Director for Scottish Mortgage, said: “HelloFresh enables customers to prepare home-cooked meals by delivering the exact amount of ingredients with clear instructions on how to cook pre-defined recipes. Scottish Mortgage first invested in 2015. Since then the company has been credited with driving forward the meal kit delivery market towards becoming a mainstream habit and it is now a global leader, supplying households with its food boxes across 12 different markets. While its subscription business model had already facilitated a shift in the way its customers shopped for food, the current pandemic has broadened HelloFresh’s reach to new households as many people seek to avoid going out to shop.”
Joshua Henshaw, Investment Executive at Mobeus, Manager of the Mobeus VCTs, said: “Parsley Box delivers quality ambient ready meals directly to customers across the UK. In March, the business saw a threefold increase in orders delivered compared to February from both new and existing customers, as people sought to ensure they had a store of healthy, convenient and long-lasting food. Although that level of demand has settled a little, it remains much higher than previously. Parsley Box is an early-stage business that was not projected to be profitable until 2022. However, recent levels of demand mean it’s currently profitable on a monthly basis.”
The challenges of COVID-19
Walter Price, Portfolio Manager of Allianz Technology, said: “Partnering with restaurants has been hard. What was a minor part of revenues for restaurants has become their lifeline. Grubhub is trying to build its partnerships by helping them survive.”
Joshua Henshaw, Investment Executive at Mobeus, Manager of the Mobeus VCTs, said: “The first priority was the safety of the call centre staff dealing with increased volumes of calls from vulnerable and anxious people. Extra staff were recruited and, to ensure they could work in a socially distanced way, Parsley Box took on additional office space. Where technology allowed, employees started working from home. Parsley Box also moved rapidly to invest in IT, securing the bandwidth needed to send increased orders correctly to the warehouse. Picking and packing those orders was equally critical.
“Parsley Box employed 50 new warehouse staff, many of whom were recruited via social media and had been seeking work because of the COVID crisis. In one week, the warehouse moved from a one-shift system to three shifts a day. Although the business had a buffer stock of its meals, such a material increase in demand reduced it quickly. Parsley Box worked hard with its food and packaging suppliers to strengthen its supply chain, even co-investing with one supplier in a new production line.”
Catharine Flood, Corporate Strategy Director for Scottish Mortgage, said: “Food delivery platform Meituan Dianping has seen demand for their services rising as a result of this pandemic. In China, Meituan’s yellow-jacketed couriers zipping around city streets on scooters had already become synonymous with the rapid growth of the region’s online food delivery market. Its order rate recently reached a peak of 30 million a day. One impact of COVID-19 has been a shift from Meituan’s takeaway services towards its grocery delivery arm which saw a huge surge as customers opted to cook for themselves. Meituan has also been developing artificial intelligence systems-based autonomous driving technology. It has used its driverless ‘Modai’ delivery vehicles to distribute food and groceries while minimising human-to-human contact to help to reduce the risk of transmission of the virus.”
Changing public perception
Joshua Henshaw, Investment Executive at Mobeus, Manager of the Mobeus VCTs, said: “Before COVID-19, just 7% of all UK supermarket shopping was done via online delivery and many subscription box services were perceived as inflexible. As demand for home delivery inevitably skyrocketed, people sought out alternatives to unobtainable supermarket slots and many actively chose to support local or smaller businesses. Just a few weeks later, there has been a paradigm shift; consumers have direct experience of food delivery as easier, more convenient and safer than shopping in person, and have developed powerful loyalty to smaller brands and businesses. At the same time, the drawbacks are either more acceptable – it’s preferable to have healthy, quality food in the house than to go out for the sake of choice – or have temporarily disappeared as the majority of households can accept deliveries at more times than before. While rampant stockpiling has thankfully stopped, more consumers are recognising the importance of having a store cupboard of long-life food.”
The long-term effect on the food delivery industry
Philip Webster, Fund Manager of BMO UK High Income Trust, said: “With the Competition and Markets Authority clearing the merger of Just Eat and Takeaway.com on 22 April and the new group raising €700m in capital, the business seems well placed to retain its strong market position. Its main competitors, namely Deliveroo and Uber Eats in the UK, are still inherently loss-making businesses, which will need to figure out a way to become profitable and remain competitive. Amazon’s recent injection of capital into Deliveroo in late April 2020, something which could be described as a bailout, displays the precarious position Just Eat and Takeaway.com’s competition find themselves in. In the shorter term, whilst we would expect sales to fall as lockdown measures are eased and consumers make up for lost time in restaurants and pubs, the customers they have acquired over this period may turn out to be ‘sticky’, which bodes well for the future.”
Walter Price, Portfolio Manager of Allianz Technology, said: “We have pulled forward the penetration curves by at least a year, but the adoption will continue to grow after COVID. Depending on life after lockdown, the industry may do very well if COVID proves persistent.”
Catharine Flood, Corporate Strategy Director for Scottish Mortgage, said: “Delivery Hero, established in 2011 in Berlin by charismatic founder and CEO Niklas Ostberg, has gone on to become the largest food delivery platform outside China. Scottish Mortgage invested as it became a public company in June 2017, as the emerging trend for consumers seeking restaurant-style meals in the comfort of their own homes started to expand. This shift in behaviour has underpinned strong growth for Delivery Hero since then. Today, it has over half a million restaurants on its platform, operating through 30 brands in 40 countries, dealing with over 1,000 orders a minute. As the company scales its network, Ostberg’s focus remains on keeping both its restaurants and customers happy by personalising the service they receive.
“Again, the pandemic may well accelerate Delivery Hero’s near-term growth, as more restaurants and customers sign up to its platform, but the relevant question for us as long-term investors is whether the immediate impacts from the pandemic lead to longer-term shifts in behaviour.”
New achievement unlocked
Are gaming companies COVID-proof?
Lockdown will have seen many former gamers dust off old consoles, as well as giving hardened regulars more time to play. We may be confined to our homes, but once a gamer sits down at a console they enter a new world. But even before COVID-19, the expansion of digitisation and processing power has been helping to fuel the growth of gaming worldwide.
How is the gaming industry responding to COVID-19? How is the industry changing and what are its future prospects? The AIC has spoken to managers about their holdings in Nintendo, Worms, Xbox, PlayStation and more.
COVID-19 – scope for increasing video gaming is “huge”
Walter Price, Portfolio Manager of Allianz Technology, said: “We like video games for cyclical and secular reasons. Cyclically, COVID-19 has reactivated latent gamers as time at home is being filled by playing games by many. Secularly, the new console cycle in Q4 2020 and the growth of streaming platforms that enable easier game play from the cloud will attract new game players who are both hardcore and casual. We think this is an undervalued part of technology and we like all the stocks to varying degrees. The event of COVID-19 has emphasised to some very powerful tech companies the value of diversified revenue streams and we think the game companies are undervalued relative to their diversification value.”
Paul Johnson, Gaming Analyst for Polar Capital Technology Trust, said: “We hold a position in Microsoft, as well as several video game publishers which stand to benefit. As early as 24 March, Microsoft CEO Satya Nadella said the company had seen ‘peak demand’ on Xbox, with engagement surpassing the December holiday season. We believe that higher engagement will translate into higher monetisation and the early signs are promising if third-party transaction data aggregators are to be believed. Given shelter-in-place orders, we also anticipate an inflection in digital downloads which have better economics for Microsoft and the publishers than physical sales.”
Alexander Windsor-Clive, Analyst for Lindsell Train Investment Trust, said: “COVID-19 has been a mixed bag for the operations of Nintendo. On the plus side, the lockdowns that have been implemented across the world have fuelled greater engagement with video game content; Animal Crossing is a Nintendo title that has performed particularly strongly in this period. On the other hand, the increased demand has met some issues with supply, given the effect of the COVID-19 outbreak disrupting global supply chains, thereby hindering production and distribution of Nintendo’s Switch console and games.”
Greg Herr, Co-Portfolio Manager of Alliance Trust, said: “Entertainment spending is a discretionary expense. During the financial crisis of 2008-2009, consumers cut back spending on games. However, the amount of money spent on video games, on a per-hour played basis, compares very favourably to any other consumer entertainment options. For example, Activision estimates that consumer investment per hour for concerts is around $31, for sporting events consumers invest $19 and a theatrical movie costs around $5.70 per hour. Meanwhile the cost-per-hour of a purchased video game comes in at only $0.46.
“With new markets opening up across the world, and the proliferation of mobile devices, we believe the scope for expansion within the video gaming sector is substantial. In the current environment, with millions of people across the globe confined to their homes in the battle against COVID-19, the scope for increasing use of video gaming is huge.”
Opportunities for companies
Harry Nimmo, Manager of Standard Life UK Smaller Companies Trust, said: “There are now a good handful of video game-exposed companies listed in the UK, but we believe Team17 is one of the lower-risk models. They are a developer, but focused on lower-budget ‘indie’ games, and work with a lot of third-party developers where they have a revenue share model. This means that there is very low capital at risk from the success or not of a particular game, with game budgets typically under £1m. Team17’s revenue stream is very diversified, and there is still significant revenue driven by back catalogue titles – they were the creators of Worms for example – where they continue to innovate on successful brands.”
Greg Herr, Co-Portfolio Manager of Alliance Trust, said: “Ubisoft, the publisher responsible for well known gaming brands such as Assassin’s Creed, Prince of Persia, Just Dance and Far Cry, has experienced strong increases in annual revenues, with 2018/19 revenues of €2.3bn marking a 17.1% increase on the previous year. Last year, the company delayed the launch of three major games until 2020. We expect the additional development time, in particular prior to the coronavirus outbreak, will allow for successful launches this year. Management recently noted that key titles continue to be on track for release, and added that engagement across all Ubisoft’s games is higher than last year. The company has abundant financial strength, is well managed and its share price trades at an attractive discount to our estimate of intrinsic value, marking it out as a strong opportunity.”
Joe Bauernfreund, Investment Manager of AVI Global, said: “We view Sony’s gaming segment as one of the four crown jewels of the empire, with the other three being semiconductors, music, and pictures. The heart of our investment thesis for Sony is that the complex conglomerate structure serves to mask the value of the separate underlying businesses, each of which are highly attractive in their own right.”
The gaming industry – “the largest and fastest growing form of media”
Paul Johnson, Gaming Analyst for Polar Capital Technology Trust, said: “The public perception of gaming has come a long way since the days when it was, unfairly in our view, regarded as a niche form of entertainment for a niche demographic. Video games have gone mainstream and, somewhat under the radar, became the largest and fastest growing form of media.
“Investor perception of the industry was gradually shifting from a volatile, hit-driven business to a stronger franchise business, where successful games can grow with each iteration, while generating recurring revenue in between with regular content updates. However, the strength of the franchise model was tested in 2018 by the phenomenal rise of Fortnite, a free-to-play game which took market share with its innovative combination of battle royale and builder-game mechanics. This showed that even the top franchises could be disrupted, at least temporarily. 2019 saw a fight back from the rest of the industry, with several of the largest franchises returning to double-digit growth in the fourth quarter. Microsoft’s first-party content can be impacted by competition, but the Xbox platform stands to benefit no matter which publishers are successful.”
Joe Bauernfreund, Investment Manager of AVI Global, said: “One common misconception about the gaming business is that its fortunes are tied to the ‘console cycle’, when the reality is that Sony’s gaming business is in the process of converting to a subscription-based digital model. We view this as a fundamentally higher-quality business proposition, as it is less cyclical, subscribers are more sticky, and future revenue and earnings are more visible. As the gaming segment completes this transition, we expect that investors will assign a higher value to it in recognition of the fundamentally different investment case.”
Harry Nimmo, Manager of Standard Life UK Smaller Companies Trust, said: “We have been invested in Team17 since its IPO in 2018. The video gaming sector has massively changed over the years, and Team17 very much fits our quality growth momentum investment style. Through digital distribution and enhanced revenue-generating additional content through the lifecycle of a game, the quality of the revenue streams and visibility of companies in the industry has improved. Digital distribution also enhanced the margin opportunity, cutting the retail channel out of the chain.”
“One common misconception about the gaming business is that its fortunes are tied to the ‘console cycle’, when the reality is that Sony’s gaming business is in the process of converting to a subscription-based digital model."
Joe Bauernfreund, Investment Manager of AVI Global
Gaming longer term
Alexander Windsor-Clive, Analyst for Lindsell Train Investment Trust, said: “We believe that Nintendo will continue to flourish in the long term, driven both by trends in the industry and the enduring resonance of its ubiquitous intellectual property, which has entertained quite literally hundreds of millions of people across the world over a multi-decade period. Companies like Nintendo with dominant intellectual property are best placed to capitalise on the digital shift and future innovations in the sector. Developments in cloud gaming, virtual reality, augmented reality and e-sports are still nascent but have the potential to fundamentally reshape the industry.”
Harry Nimmo, Manager of Standard Life UK Smaller Companies Trust, said: “Since its IPO, Team17 has delivered consistent earnings upgrades, and the CEO and founder Debbie Bestwick is very highly regarded by us. We believe they continue to have a strong pipeline of new development opportunities, and increasingly strong reputation in the industry, and third-party developers globally are keen to work with them.”
Paul Johnson, Gaming Analyst for Polar Capital Technology Trust, said: “We remain positive on the long-term outlook for the industry. In the autumn, Microsoft and Sony will be launching new console hardware for the first time since 2013. With the launch of the Xbox Series X, you will be able to have an a 12-teraflop console in your living room, which has a similar computing power to the IBM ASCII White supercomputer which went into operation in 2001 at a cost of $110m. This may be the last console cycle, however, given investments in cloud and streaming by Microsoft and Sony and new entrants Alphabet, Amazon and Facebook. Once the technical issues are overcome, streaming will really come into its own in combination with 5G connectivity, which could dramatically increase the total addressable market for the publishers by opening up AAA titles to the over 2.5bn mobile gamers across the world.”
Not just a growth story
Ian Cowie considers the income attractions of emerging market equities
Contrary to what many investors imagine, emerging markets are not just for those seeking capital growth; they can deliver decent dividends with increasing income too. For example, according to independent statisticians Morningstar, the 15 companies in the AIC's Global Emerging Markets sector deliver an average dividend yield of 2.6%.
That’s not bad at a time when interest rates are near historic lows but what might be more surprising is the rate at which shareholders’ income from this sector is rising. Over the last five years, it increased by an average of 14.5% per annum. If that rate of income increase is sustained in future, which is by no means guaranteed, dividends would double in less than five years.
Here and now, emerging markets investment companies deserve wider consideration, including as part of a retirement portfolio or 'forever fund' like mine, because they provide professionally-managed, convenient and cost-effective exposure to some of the most dynamic economies in the world. These are often found in developing nations that are becoming more engaged with global trade as they grow. Traditionally, that growth was heavily dependant on exports to the developed world but, increasingly in recent years, growth has been generated by domestic demand from, for example, a rising middle class in emerging economies.
Since 1988, the benchmark for this sector has been the MSCI Emerging Markets Index, which includes 26 countries and spans 1,100 stock market listed businesses across five continents. These include China, which alone represents 33% of the MSCI EM Index; Korea (13%); Taiwan (11%); India (9%); Brazil (7%); South Africa (6%); Russia (4%); Mexico (3%); Thailand (2%) and Others (12%). All percentages have been rounded to the nearest integer.
It can immediately be seen that a very wide variety of economies are included within the emerging markets category. Several investment companies outside the global sector also give exposure to individual emerging markets, delivering dividends now in addition to hopes of growth in future.
For example, in the AIC’s Latin America sector, my shares in BlackRock Latin American (stock market ticker: BRLA) currently yield 8.6% from a portfolio where more than 60% of assets are invested in Brazil, with the next largest national allocations being Mexico and Columbia. Dividends increased by an average of 7.2% per annum over the last five years. If that rate of increase is sustained, which is not guaranteed, dividends would double in a decade.
Similarly, Henderson Far East Income (HFEL) sits in the AIC’s Asia Pacific Income sector but one reason I have been a shareholder for many years is that more than a third of its portfolio is invested in MSCI EM index members Taiwan, South Korea, Thailand and Indonesia. Contrary to the stereotype of emerging economies relying heavily on commodities, HFEL’s two biggest underlying holdings, Taiwan Semiconductor Manufacturing and Samsung, give access to digital new technology. Even so, HFEL yields 7.2%.
Both Taiwan Semiconductor and Samsung are among the top 10 holdings at Jupiter Emerging & Frontier Income (JEFI), which also gives me access to even more early-stage economies in Kenya and Nigeria. An eclectic collection of underlying businesses includes Norilsk Nickel, the world's leading producer of nickel and palladium. The former metal is used to strengthen steel; the latter in exhausts and fuel cells. Norilsk is co-owned by Roman Abramovich, the Chelsea Football Club supremo, not a man the small shareholder often gets a chance to invest alongside. JEFI yields 5.1%.
Meanwhile, JPMorgan Indian (JII), my longest-held share, where I first invested in 1996, and Vietnam Enterprise Investments (VEIL) both seek to benefit from capital growth in low-cost, highly entrepreneurial economies. They may even gain from rising tension between America and China, as the former economic superpower seeks to source imports away from the latter.
It’s an ill wind that blows no good. Emerging markets investors can buy a stake in the future while being paid to be patient with attractive income today.