Citywire A-rated Matt Linsey has championed athletics company Peak Sports as an example of the single stock ideas which can help EM investors overcome China’s ‘problematic’ outlook.
The boutique founder currently has 15% of his North of South Capital Emerging Markets fund, which he runs a Ucits-mirror of for Swiss group GAM, invested in China.
‘China remains the most problematic for investors to decipher - will the government support a “2009 style” stimulus or actually attempt to reign in areas of the economy where there is overcapacity? And will they actually report accurate data on reserves or growth should it turn out to be market negative?’
While facing strong headwinds, Linsey is keen to tap into the ever growing health and wellness market which has continued to grow steadily over the past decade. Research conducted by Euromonitor International has suggested that by 2017 the will hit sales of around $1 trillion.
Here he cited Peak Sports, which manufactures athletic shoes, as an example of a stock which has de-rated but remained fundamentally strong. ‘It trades on a prospective 2016 EV/EBIDTA of a little more than 2.0x with their net cash accounting for over 70% of its market capitalisation.’
‘The stock has been de-rated over the past few years and the sector has faced problems with excessive inventory between 2011 and 2013. The company has left these issues behind and net income has grown by over 20% in each of the past two years.’
Linsey said the stock can easily maintain its current dividend yield of 8% given its high free cash yield, which is in excess of 10%.
Several factors have worked in reversing investor sentiment, which peaked in mid-February, Linsey said. These include hopes of a deal to stabilise oil prices, a more market-friendly government in Brazil and a slowdown in the number of overall earnings downgrades.
Linsey thinks it would be difficult to imagine a more dovish Federal Reserve or an agreement on oil prices that does not include Iran.
‘From a flow of funds perspective there has not been a significant amount of money flowing into our asset class compared to other periods of relative out performance. The recent inability to reach an agreement in Doha to stabilise oil prices was followed by a surprisingly mild fall in prices.’
Political upheaval could be a positive move in Brazil and would create big change in the country, which may in turn warrant towards a more market friendly government.
Investors have previously questioned if such dramatic political movement would help or hinder growth in the country. ‘In regards to Dilma’s potential departure a lot is already in the price, particularly as it relates to the currency given the Central Bank’s willingness to intervene to stabilise its value.’
Although the pace of downgrades has been slow the company are not seeing significant increase in earnings expectations.
The GAM Star North of South EM Equity fund lost 10.5% in US dollar terms over the three years to the end of March 2016. This compares to a fall of 11.9% by its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD, over the same period.