By Luca Rossi on 25 August 2014

Picking up the post-sell off pieces

In the six-year period after the global financial crisis, emerging markets had an annualised return of -0.9%, compared to 3% for developed markets, according to Scott Berg. portfolio manager of the T. Rowe Price Global Growth Equity fund.

Out of this sector, only half of the emerging markets managed positive returns. Berg, who is Citywire + rated, believes the tide may be turning this year, with investors showing more discernment after last year’s broad, indiscriminate sell-off.

In his latest commentary, Berg said he has pursued a diversified, but very selective, strategy in order to target companies with the most durable earnings power. Here he outlines his best EM bets and why.

Philippines & Indonesia will surprise to the upside

‘We believe that the stars are especially aligned in the well-run economy of the Philippines, which having been pressured by concerns over an Asia Crisis II in 2013, is actually characterised by a strong economy with a balance of payments surplus and moderate inflation,’ Berg said.

Elsewhere in Asia, while Indonesia does have some materials and energy leverage, its reliance on commodities to drive its growth is not of the same magnitude of Brazil and South Africa, he added.

‘With excellent demographics, infrastructure development, and low GDP per capita in its favour – the economy should grow at a solid 5% to 6% rate. The country appears to be moving in the right direction from an infrastructure spending perspective, and new political leadership could be a catalyst.’

India may be the new China

Berg said that, for all the gnashing of teeth about India in 2013, its economy has grown at a real rate of 5% per annum over the past two years.

‘The country has a young population, low but growing GDP per capita and tremendous upcoming growth in the labour force,’ he said.

‘Together with rising urbanisation and an expanding middle class, this provides a backdrop for dynamic growth areas within the economy. Its significantly underdeveloped infrastructure poses both a challenge and opportunity,’ Berg added.

Berg thinks the recent election of Narendra Modi offers the opportunity for a more growth and business-oriented government in India, with the potential to replicate what China achieved over the last 20 years.

Turkey’s growth potential

Berg believes that, despite Turkey being labelled as one of the ‘Fragile Five’ in 2013, the policy steps the country implemented last year have been handsomely rewarded so far this year.

‘The country has a robust long-term economic outlook, with very favourable demographics. While there is near-term political uncertainty, valuations should normalise over time,’ he said.

Berg believes Turkey’s flexible economy, strong government balance sheet, growing population, and labour participation will produce a significant economic growth, to the benefit of many domestic companies.

Nigeria cleaned-up system

Berg is also positive on some frontier markets such as Nigeria, Vietnam, and Myanmar, with a preference for the African country.

‘Nigeria has its challenges, but it is the largest and fastest-growing economy in Africa encompassing more than 170 million people. Nigeria has cleaned up its banking system, and the non-oil parts of its economy such as agriculture, services, and industrials have had robust growth,’ he said.

What about the political tensions constantly threatening the country? ‘Yes, there is political risk in Nigeria, but it is a small part of a global portfolio. If the political leadership improves, there is much to like.’

Bullish on Brazilian and Chinese consumers

Berg said he is also opportunistic when it comes to finding compelling individual valuation situations. Particularly in markets at the centre of concerns surrounding the emerging world’s slowdown in GDP growth.

Brazil’s economic growth is sluggish compared to other emerging markets, but, Berg said, the appetite for consumption remains intact. ‘We continue to believe that shopping malls are a fertile area for investment. Our favoured holding has nearly twice the growth of the average shopping mall in the developed world, with a considerably lower valuation.’