When it comes to the Middle East, Fidelity's Emerging EMEA Markets Fund has just one stock: Industries Qatar, a conglomerate that includes both petrochemical and fertiliser companies.
"They have got cheap feedstock and cheap gas that is ultimately used in the fertiliser sector. Right now that is what the world needs and we like it," says Mark Livingston, investment director of emerging market equities, Fidelity Investments.
But generally speaking, what happens in the Middle East is a bit inconsistent with the way Fidelity looks at stocks, he says. For example, with regard to the Emerging EMEA Funds, liquidity is very important.
"It's a highly liquid, highly scalable fund. The companies in the Middle East and the UAE, generally speaking, don't have the liquidity for the size we are looking for.
"In addition to that, what happens in the Middle East is sometimes they blow hot and cold. And so the way we look at companies are ones which are serial compounders — that have growth over a period of time as opposed to what we are seeing which is a sharp rally. We look to avoid that."
And on Saudi Arabia, the biggest market in the Gulf, he feels it is still quite difficult for international investors to get into the market. "But we always keep it on the radar, with our team visiting them."
STOCKS TO WATCH
- In China, Fidelity's picks are manufacturers of smartphone parts such as Largan Precision, which is involved in the front and back-end technology of iPhone cameras. Historically they have also bought into AAC Acoustic, which manufactures the microphone. In fact, in the fourth quarter of 2011, global smartphone sales grew by 47 per cent, driven by demand for Apple's iPhone.
- In Nigeria, it's Nestle Nigeria and a number of banks such as Guaranty Trust Bank. The banks in Nigeria are well-capitalised, with strong lending growth and net interest margins in excess of seven per cent.
- In Colombia, it's Grupo Suramericana, a conglomerate, and Pacific Rubiales, the Canadian-listed oil exploration and production (E&P) company. The former is a conglomerate, which owns the largest bank in the country, Bancolombia. As such it is a play on credit expansion in Colombia, as people become wealthier (rising GDP per capita) and have an ability and desire to spend money. This can come from accessing credit for the first time to buy consumer goods through to buying a first home with a mortgage.
- Colombia's security situation has vastly improved over the last ten years. So the Pacific Rubiales' executive team is applying their know-how in enabling the country to produce more than one million barrels of oil a day. The stock really struggled last year due to lower production than forecasted and worker unrest in 2011, which presented an ideal entry point in early January, this year, for investors looking to get access to the oil E&P.
- In Russia, oil and gas stocks are very inexpensive from a global context and cash flows have started to improve. While the political situation deserves watching, several solid names at attractive valuations can be found. Currently, Fidelity is overweight Lukoil, on the basis that its oil production is expected to decline at a lower rate than the market is currently expecting. It also likes Sberbank, which is well capitalised and has a dominant market share in one of most profitable and underpenetrated banking systems in the world. Furthermore, Sberbank's strong deposit base translates into high interest margins of between six per cent and seven per cent. And last, but by no means least, it has consistently been delivering a return on equity in excess of 20 per cent.
- In Brazil, it's a play on consumer demand. MRV, a low-cost home builder that sells houses through a social programme, is a favourite. The stock has benefitted from the recent drop in interest rate. Banrisul, a bank in the southern state of Rio Grande, is another stock to keep an eye on. Rio Grande is home to a number of government employees and therefore represents a fairly sticky deposit base for Banrisul, which is then lent on to a relatively low-risk borrower.
- In Mexico, Alfa and Banorte are Fidelity's choices. The former is a conglomerate involved in a number of industries. Alfa's auto components company, which supplies auto parts to US car companies and its petrochemicals business supplying cheap feedstock to shale gas fields of North America make it an attractive pick.
- Retail spending has been pretty strong in Mexico and Banorte, a well-capitalised bank, is a natural beneficiary of this. Mexico is dominated by a number of foreign banks from the developed world, which have had to pull back from the country due to problems in their home markets. This puts Banorte in a unique position in that it is not faced with the same headwinds.
- In South Africa, food retailer Shoprite has done well in its home market, by centralising its distribution system and streamlining many activities. It has since been replicating that same model across Africa in places like Nigeria and Zambia, which is home to a still under-appreciated African consumer, that generates strong margins for the supermarket operator. However, while Fidelity is bullish over the company's long-term prospects, valuations are a little rich — so it has reduced its exposure. If there's a dip in price, Fidelity might add to its position.
- Another company is Harmony Gold, a high-cost gold producer in South Africa. At the current rand gold price, it appears to finally be able to generate excess free cash flow, which is important in that it is seeking to use that money to take advantage of its assets in Papua New Guinea, where it is a 50-50 partner in Wafi-Golpu. Wafi Golpu is probably one of the most impressive copper-gold finds in the last 30 years and yet the market still has failed to fully account for its potential.