Global Equity Spotlight Episode 10

Hello everyone, and welcome back to Market Insights, a series where we delve into interesting topics affecting equity markets. Today I have Cornelius joining me. Thank you so much for being here. So let’s kick off. So we’ve seen really strong results coming out of us tech names. Could you maybe elaborate and unpack where else we can find similar growth and take opportunities.

Yes. So emerging markets actually has a lot of growth and tech exposure these days. I think when people think about South Africa, which is dominated by cyclical sectors like financials and resources, we know the banks and the miners or a significant portion of our index. They often think emerging markets are the same. But emerging markets these days actually has more e-commerce and information technology exposure than MSCI ACWI, and if you look at cyclical exposure, they do have more financial exposure but less industrials. So if you look at the traditional cyclical sectors as a whole, it’s actually as cyclical as MSCI ACWI and much less cyclical versus South Africa. And then the Overweighting growth and tech exposure is funded by having less exposure to healthcare versus MSCI ACWI, which is dominated by the US, which makes about 70% of the market and that underweight in ask is arguably a good thing because we know the US are spending an unsustainable amount on health care and we can see the Trump administration are going after some of the profit pools. And a lot of health insurers and the former companies, have been under pressure lately.

Brilliant. And how are you seeing that filtering through and to stock specific opportunities.

So we remain bullish on China e-commerce. But as we’ve discussed in previous sessions, there is a food delivery fight going on in China. So you have to be quite selective with the exposure that you take. But we still like a company like Tencent. They have seen an acceleration of revenue growth basically every quarter over the last year and a half. And pleasingly, we are also seeing margin expansion these days because a lot of the newer businesses like fintech and advertising have reached sufficient scale as well as international gaming. So both have gross profit margins as well as the EBIT margins are expanding. So you are seeing high single digit, revenue growth over the medium term and earnings growth faster than that due to the margin expansion as well as the buybacks, of course, with the Fairtree Global Equity Fund and the Emerging Market Fund, we can select whether we want to take the exposure directly to Tencent or Prosus on Naspers. And we are very active in moving between the three names, depending on where the discounts trade, because every 10% move in, the discount on a 5% position is an additional 50bps of performance.

We also remain constructive on a company called Taiwan Semiconductors. It’s by far the largest holding in the emerging market fund and also top ten holding in the global equity fund. This company, as have grown revenues at 14% historically. And we’ve seen the market share in the foundry space continue to increase as I dominate, the companies like Intel and Samsung, we can’t keep up with the amount of R&D that they’re spending. So they’re continuing to lead, in chip development. And, the medium growth outlook is actually for acceleration. So we expect them to grow closer to 20% going forward. There. We take exposure directly in Taiwan. It’s of course, very difficult to open up trading lines in certain EM countries like, Korea, Taiwan and India. And because of this friction, you actually see the Taiwan Semiconductor ADR in the US trading at a 25% plus premium these days, which is quite rare. It’s only happened 3 or 4 times historically. And a normal premium is closer to the 5% level. So we decide to take exposure in Taiwan, at a 25% discount, which is very attractive for investors.

Thank you so much for that, Cornelius. Looking forward to having you on our next session. To the audience thank you so much for attending. Please feel free to join our next session, where we’ll discuss some country specific opportunities that we see in our emerging market fund. Thanks so much.