Top-performing emerging markets manager Nick Price has warned equity investors to pay careful attention to the levels of debt businesses are carrying.
Mr Price, who runs Fidelity’s £889m Emerging Markets fund, said the greatest risk for emerging market equity investors was that corporates had more outstanding debt than sovereigns.
The manager said he was wary of these debt levels, particularly given the changing dynamics in commodity and currency markets, which can negatively impact emerging markets.
As an example, with oil still well below its peak price of last year – Brent currently trades at roughly $68 compared with $115 in 2014 – many emerging market economies have come under pressure.
Mr Price said the low price had taken a toll on the current accounts of oil-exporting countries, such as Russia, Nigeria, Venezuela and Colombia.
And as the dollar continued to strengthen, those emerging market companies that had benefited from the exchange rate rather than their own strength would start to show their weakness, he said.
This was because if companies had refinanced debt in dollars and their earnings were in local currency, then they needed to raise profits to maintain the debt load.
“Understanding the nature of a company’s debt load is critical,” Mr Price said.
The manager said he was wary of currency mismatches on a company’s balance sheet and aimed to determine a business’s sustainable earnings using a realistic commercial rate.
One sector he had found with favourable conditions and sound balance sheets was the Indian car industry, where sales had increased last year.
India’s market has performed well since the election of president Narendra Modi in 2014 and is Mr Price’s largest overweight country position.
He held 19 per cent of his fund in India at the end of March this year – an 11.6 percentage point overweight compared with his benchmark MSCI Emerging Markets index, the fund’s factsheet shows.
Mr Price said he was also confident about emerging market internet providers, given that internet access was between three and 10 years behind that in the developed world.
His third-largest overweight position is Chinese internet company NetEase.
The company made up 4.2 per cent of his fund at the end of March, while the index held none, the factsheet reveals.
Mr Price had a mixed view on China in general.
While he was bullish about China’s early-stage consumers, which he predicted would see growing levels of disposable income, he acknowledged this would be a “gradual transition” and there would be “divergent fortunes” at the stock level.
For example, Chinese state-owned car manufacturer SAIC has seen its share price nearly double from Rmb14.5 (£1.54) to Rmb27 in the past year.
In contrast, heavy machinery company Sany has fallen from Rmb14.8 to Rmb9.8 in the same period.
SAIC is Mr Price’s eighth-largest holding, making up 3.6 per cent of his fund.
Manager doubles assets in Emerging Markets fund to £889m
With the emerging market offerings from Aberdeen and First State levying punitive charges for new investors to access, other fund groups have been fighting tooth and nail to get a piece of the action.
And it seems Fidelity has fared well with Nick Price at the helm of its emerging market fund. The manager has seen assets in his fund double to £889m from £435m at the end of January last year.
This is interesting given the recent underperformance of emerging markets compared with their developed peers, but perhaps investors are predicting a turnaround.
Recent analysis by CrossBorder Capital suggested cross-border capital flow data indicated developing economies were about to start benefiting from rising liquidity, which could lead to a market rebound.
