Emerging markets - Growth story remains intact

Global emerging markets (GEMs) typically have low leverage, well capitalised banking systems and scope for strong and rising consumer spending.

Corporate balance sheets are robust and companies have plenty of spending power. Inflation may have been a concern earlier in the year but now appears to have peaked and the focus of central banks is shifting to one of support for domestic growth.

Many have already started the process of monetary easing, or cutting interest rates. Valuations are at the lower end of their historic trading range, presenting an attractive picture for long term investors who are able to disregard the tensions created by Europe.

By focusing on such long-term fundamentals, we continue to find companies throughout the world that are able to deliver superior returns. We tend to look most closely at those companies, including those in the mid-cap area, that can maintain pricing power, offer a sustainable dividend and demonstrate commitment to all shareholders.

One good example is Mexican department store group Liverpool. Founded in 1870, the $5.8bn (£3.7bn) firm’s consumer finance business makes it the fourth largest card issuer in Mexico, while its department stores appeal across socio-economic groups.

We invested in the company earlier in the year on the back of our high conviction in its management and the quality of its business following a meeting with the company in Mexico City.

Liverpool was one of the strongest performers in our portfolio during the weak November period. Even in light of the progress it has made this year, we believe it has further to go, with its valuation still trading at substantial discount to peers.

Liverpool also serves as an example of two themes we are playing within the fund: resilient domestic growth and rising consumption. The emerging market consumer as a global force is in its infancy.

As consumers’ spending power grows, so their tastes and aspirations develop, creating a virtuous spending cycle accelerated by powerful demographic changes. Approximately 2.6bn people from emerging countries are predicted to join the middle class over the next 20 years, adding roughly $10trn to global consumption.

Although emerging market themes such as this represent enormous potential for growth, emerging market equities remain exposed to changes in sentiment from international investors. Owing to concerns about the impact of a eurozone collapse on global growth, this has created a much more volatile investment climate for those seeking value in developing economies.

In spite of successful attempts to bolster domestic and intra-regional trade, many of the largest emerging market economies continue to rely on western economies to buy their exports.