A little over six months after taking the reins on the Allianz Global Investors’ Bric Stars fund from Michael Konstantinov, Kunal Ghosh has re-positioned the portfolio for a cyclical recovery in emerging markets.
‘We are getting to the last innings of the game in the emerging markets. A final capitulation will happen before they outperform developed markets again. The turning point will depend on how China’s cards finally play out,’ Ghosh said.
In a contrarian stance, Ghosh said he is a “big fan” of China, backing it to maintain solid levels of GDP growth and benefit from demographics. He acknowledges, though, that the investor scepticism about the Asian powerhouse and the wider emerging market universe is deep-rooted.
‘When the world’s largest economy is only growing at 2%, why get alarmed about the second one growing at 7.5%? Something is seriously wrong in the benchmark [investors use],’ he said.
‘You’re in denial that the country is shifting gears. China’s payoff might come a little later, but you need to position the portfolio without anchoring for what happened in the past.’
He points to Chinese retail sales growth rising by 12-13% on an annualised basis over the past eight years, something Ghosh describes as unparalleled. ‘The recovery is coming in stock specific stories, not across the whole index,’ he added.
Chinese stocks make up a third of his top 25 holdings, including names such as Bank of China and Sands China, and Ghosh expects an economic surprise to the upside in the third quarter.
Indeed, this represents a significant shift in the portfolio make-up. ‘The historical portfolio positioning was paying a high multiple for quality, not growth,’ he explained, pointing to the likes of Petrobras and Chinese energy firm Fanuc as positions he has axed.
Ghosh is less positive overall on Indian equities, and expects the elation brought about by the recent elections to die down soon. ‘[Newly elected prime minister] Narendra Modi is very pro-economics and has a lot of good credentials, but we think the euphoria is going to fade away after the next earnings season, which is coming up.’
The issue is purely structural, he said, because the country’s reforms are not stalled by the federal government, but by state governments. He takes the example of the large retail reform, which was enacted to allow businesses to open up to foreign investors, such as Tesco.
While the reform was applauded by investors, only nine of the county’s 27 states have actually allowed foreign retail participation.
‘Of the projects that have been held up, only 25% are at the central government level. There is no low-hanging fruit for this new government to come and pick, or immediately implement change.’
Meanwhile, Ghosh said, Modi is poised to reshape the country’s logistics, including roadways and railway systems, which he expects will take up to three years to achieve.
In light of this and the weakness of the Indian rupee, the fund’s exposure is mainly export-focused in the auto sector with a 4% allocation to Tata Motors and a 3.1% position in manufacturer Apollo Tyres.
Brazilian consumer story
Ghosh’s overhauling of the fund’s portfolio has also seen him move into Brazilian consumer stocks, primarily in private sector banks and away from retailers, which are not able to pass on inflation to shoppers.
He has doubled his exposure to Brazilian bank Itau Unibanco, which he expects to deliver attractive earnings growth as well increasing his holding in insurance firm Porto Seguro.
He has also introduced a position in Cielo, a credit card processor, which now comprises 4.2% of the portfolio and is his second largest holding.
Outside of the Brics, where he holds 62% of the portfolio, Ghosh expects Taiwan, South Korea, Malaysia, Mexico, South Africa and Poland to show ‘meaningful growth’.
In South Korea, he highlights iPhone metal casing producer Catcher, a personal favourite, delivering ‘explosive’ returns.
Over one year, the fund has returned -9.62%, ranking it 67/140 peers, up from its 94/101 ranking over three years.