Back in Q4 2008, when Lehman went belly up and it seemed that the global financial system had been undermined, one of the last scenes of Blade Runner came to mind.
That we were all hanging on for dear life with no obvious escape was mortifying. The threats that we face today, while different – inflation, higher interest rates, conflict and Covid-19 – have conspired to undermine confidence in a similar fashion.
But let us revisit 2008 for a moment.
Markets had been falling since May and the red ink continued all the way to March the following year.
Over the period, emerging market indices were down 62 per cent.
Perhaps more worrying than the decline in the price of financial assets was the mayhem in the 'real world', with credit being withdrawn, trade slumping and corporate bankruptcies commonplace.
The stock markets were indiscriminate, prices were decimated no matter how strong the underlying business of the company.
Babies were thrown out with the bathwater. Talk back then of fundamentals and valuations was laughed out of court. The same has occurred over the past six months.
We focus on the EM consumer and when we look back at our holdings from that time some of them fell so dramatically that even Rutger Hauer would flinch.
Many were 40 percent down, some shed as much as 75 per cent of their value.
However, if you have a process that can identify companies with strong fundamentals meaning they are, for the most part, better able to survive global downturns than their over-leveraged counterparts, then such price falls can provide fantastic entry points.
For example, one of our holdings, Baidu, fell by 70 per cent from its May 2008 level.
By September 2009, however, it had recovered that level, and by June 2010 it had doubled.
Titan fell almost 40 per cent from May 2008 but had recovered a year later.
By July 2010 it was up a further 100 per cent. Tencent fell 45 per cent in the months after May 2008, presenting a great buying opportunity by October, and was a major contributor to our performance for the subsequent decade.
We are not simply cherry picking here, as a significant number of stocks on our watchlist had doubled within two years of Lehman’s collapse and were up by an average of 140 per cent within five years. By contrast, the MSCI EM Index was up just 25 per cent and 21 per cent in two and five years respectively.
For any investor prepared to contemplate the fundamentals of the emerging markets just now, we believe that valuations in the following consumer sectors demand consideration.
Now that the most draconian lockdowns have been lifted by Beijing the Chinese population will certainly start spending again, and we have added substantially to our exposure – up to well over 40 per cent from 30 per cent.
Several existing holdings have been topped up and new positions in an online pharmacy, a leading condiment producer and an ecommerce business have been added.
While getting China right is critical to performance in any EM portfolio, it is not the only opportunity.
India has been particularly rewarding. Although our exposure has been reduced, a recent trip to Puna and Mumbai confirmed our confidence in the huge long-term potential of the country.
We are positive on selected property stocks and electric vehicle plays, among others.
Thailand’s tourism sector has been decimated by Covid but there are signs this is now reversing.
A subset of the travel sector, medical tourism, is burgeoning.
Indonesia has the rewarding combination of a large and young population of consumers.
We anticipate growth will exceed expectations and have positions in a consumer finance bank and ecommerce.
Vietnam is an economy that has proved resilient throughout the past few years of turmoil.
We hold a leading retailer with an attractive valuation and a long runway of growth ahead.
Outside of Asia we have a longstanding holding in a Polish supermarket and have recently acquired a Mexican airport company.
There are certainly differences between the GFC and the current headwinds facing global markets.
Some might even argue that the threat to global capitalism was more existential in 2008 than those that face us today.
Be that as it may, our experience of various crises over the past 30 years, though painful at the time, can present great opportunities if you can pick the right stocks.
Mark Martyrossian is a director at Aubrey Capital Management
