4Q 2020 Europe Equity Outlook: Growth Resumes, Slowly But Surely
Portfolio Manager Jin Zhang pays close attention to secular shifts that are accelerating or changes that may become permanent because of the pandemic.
Emerging markets have generally provided less monetary and fiscal support for their economies than developed markets and so have accumulated less debt through the COVID-19 downturn. In addition, in the years before the crisis, there was limited excess credit generation among many emerging market countries. In our view, past prudence will be good news for the future of EM, over the long-term. Owning the right business is the best way for investors to weather the crisis. While India has been struggling to contain the virus, businesses are recovering as the economy gradually reopens. Asian Paints, the country’s largest paint company, saw 16% growth in volumes in June. That recovery has carried forward into the third quarter. Similarly, in Latin America, FEMSA, which owns beer brands, a Coca-Cola bottling franchise and retail chain OXXO, initially suffered due to decreased traffic and falling revenues. Beer production and sales have resumed, and green shoots are returning.
Investors can identify strong companies across emerging markets if they look beyond the current disruption. We expect beer consumption and sales to go back to normal levels for Budweiser APAC, with earnings power intact two or three years out. Other companies are taking advantage of the situation to consolidate, such as retailer Mexico’s Walmex.
The external pressures on China are high and likely to continue, regardless of the US election outcome. However, the economy is recovering quickly thanks to domestic demand. Investors should focus on businesses that have stayed strong and have good domestic prospects, such as Yum China, the KFC and Pizza Hut franchise. While Yum China is well entrenched in coastal cities, there are many smaller cities inland where it can expand. And, Chinese tech stocks have pulled back, but declines have been moderate. We believe most valuations are quite reasonable in this area.
As bottom-up investors, we are not concerned by the timing of a vaccine or how long the Covid fight will last. Despite these uncertainties, the strongest businesses in their respective industries will prosper in the long run. However, we are paying close attention to secular shifts that are accelerating or changes that may become permanent because of the pandemic, such as the move to online grocery shopping and online education, and shifts in global supply chains.