Fairtree Market Insights with Karena Naidu | Episode 8

Karena
Everyone, and welcome back to Market Insights, a series where we delve into interesting topics affecting equity markets. Today I have Cornelius and Jacques with me. Thank you guys for being here. So maybe let’s spend some time looking at our emerging market exposure. Over the last 18 months, we’ve seen quite the rally coming out of China, but we’ve actually sold down some of our exposure in the funds.

Jacques
So we do still remain quite constructive on the China consumption theme and especially the e-commerce players. JD.com, Baba and OTA and Tencent reported very strong results over the past quarter, specifically from the core China retail businesses. But what’s driven the change in our positioning was Jericho maintaining the free delivery market.

They’ve been very successful over the past quarter, having gone from essentially no more Kashi to more than 50% market share, but this has come at quite a big cost. We just invested more than 10 billion Remembe into their food delivery business through subsidizing products, but also having a very low take rate. And might one responded through their own investments to the point where both JD and Meituan was actually loss making on an operating profit level in the past quarter.

Baba’s e-commerce business also reported a very strong result, with a local e-commerce business. Margin is under pressure from the instant delivery that they’ve entered. But it’s been offset by the continuing improvement in the in the international business and very strong results from the cloud business that’s grown 26% year over year. Baba is now investing quite aggressively into the cloud infrastructure business, and they’ve reiterated their three year CapEx guidance of 380 billion renminbi to build out the cloud business.

So from a positioning perspective, which would stop a Baba position as they continue to invest into this cloud business, and JD and Meituan, although it seems like competition has beat the next set of results, will still be under a lot of pressure as they continue to invest over the short term.

Karena
Brilliant. Thank you. So, given your reduction in Chinese exposure over the last few months, what are you seeing in the rest of the emerging market space?

Cornelius
We remain broadly constructive on emerging markets. We still, have a overweight position in countries within our global equity fund and within the emerging market fund, we found many opportunities to redeploy capital. So we also, did very well on our South Korea position with the political change in the value up program, with all the stocks that have rallied, which we’ve discussed in the past.

So we’ve actually taking money from both China and Korea and redeploying it into countries with the best valuations. Where we are seeing monetary policy is close to a peak in terms of tightness. So there’s many countries like Brazil, South Africa, Kazakhstan and Turkey with very high real interest rates, which makes it very difficult for for equities to perform well.

And we are seeing inflation coming down in all of those countries except, Kazakhstan. Inflation remains quite sticky. But there’s a lot of scope for reserve banks to cut interest rates in those countries to become. And they’ll still be competitive with the likes of the US. So as real rates comes down in those countries, the equity ratings, should go up.

The consumers will have more money in their wallet, which will drive consumption and which will drive earnings for companies, in those countries. So we are definitely not short of ideas in our fund.

Karena
Brilliant. Thank you. I’m really looking forward to seeing how these themes play out over the next few months. Just a reminder to the audience to join us for our Equity Explorer series, a live webinar where last month we looked at Kazakhstan. We delved into Caspi and Halik, and this month we’ll look at the payments space. We will look at Visa and Mastercard. Looking forward to seeing you there. Thanks so much.