Fidelity Emerging Markets manager Nick Price may be underweight financials, but this positioning actually masks his excitement about some of the emerging world’s best banks, coupled with trepidation about some of its largest.
At the portfolio level, the AA-rated manager has 24.1% in financials, lower than his index’s 27%. That exposure has been creeping up recently though, from an April low of 20.4%.
That increase followed a trip to Brazil earlier this year, which convinced Price (pictured) of the merits of two banks in particular, despite the macro cloud hanging over the country.
‘Brazil has a seismic event coming through over the course of the next six to 12 months, which is the outcome of the elections. It is still odds on that Dilma Rousseff will win the election, which the markets will not see as a positive.’
That pessimism is already reflected in local banks’ valuations, however. Price’s favoured plays, Itaú and BTG Pactual, trade on eight and seven times earnings, respectively.
‘When you’re trying to contextualise a Dilma election, both of those stocks price in a lot of the negativity. In the event of her losing, which is very unlikely, you would see significant upside. We will still grind out a good return over a 12-month period in the event of an unsatisfactory election.’
Price suggests a base upside case of 15-20% for the banks, with up to 50% if a new reformist president is elected instead of the incumbent. That is because they are essentially self-help stories, not beta plays.
‘The banks are conducting their activity with the expectation of an extremely muted economy, so they are not pursuing strategies to aggressively grow loans. What the banks are trying to do is improve the fee income structures surrounding their businesses.’
In India – another emerging giant that has benefited from political change this year – Price is more sceptical about the banks. ‘India is probably one of the brightest stories in emerging markets and one of the brightest stories globally,’ he said.
That has not been enough to tempt him into the local banks, however. ‘There are very cheap state-owned banks, but they are cheap for a reason. They will inevitably come to the market to raise capital.’
Price added that he had ‘significant concerns about the asset quality and indeed much of the operational expertise’ of such banks, too.
He views China through a similar lens. ‘I am not overly concerned about China per se. They have the wherewithal and they are tackling some of the issues in their banking sector on the front foot, unlike the Western world during the global financial crisis.’
Nevertheless, Price owns no Chinese banks, or any of the property groups that are intractably enmeshed in their balance sheets. ‘It is simply because when we try to quantify the levels of provisioning required. The stocks do not look attractive and, of course, there is an element of guesswork in that, given the scale of China’s financial system.’
Price is more enthusiastic about his positions in certain frontier market banks, notably Nigerian ones, despite their recent ‘lacklustre’ performance. ‘They remain extremely cheap, they pay us an 8-9% dividend yield and I believe these businesses should compound in the range of 15% to even 20%, depending on the particular banks.’
The manager is also backing African Bank Investments, a South African micro-lender whose share price has almost halved during the past year. Price bought in after a series of profit warnings. ‘They then subsequently did a “kitchen sinking”, whereby they wrote off all the goodwill in its businesses.’
He expects it to double over a three-year timeframe.
During the past three years, Price has returned 3.5% with the £636 million Fidelity Emerging Markets fund, a Citywire Selection pick. This represents top-quartile performance in a sector where the average fund has lost 5.7%, while the MSCI Emerging Markets index is down by 7.8%.