Jupiter: Unchaining emerging market investment

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Jupiter Asset Management fund manager Ross Teverson says mid-cap emerging market stocks and frontier markets currently offer some of the key opportunities for investors.

Talking to Professional Pensions editor-in-chief Jonathan Stapleton as part of a new video series, Teverson (pictured) - the head of emerging markets strategy at Jupiter - said he believed mid-cap stocks in emerging markets tend to offer better opportunities today than many of their large cap counterparts.

He explained: "In large caps we see quite a bit of crowding and, over the last few years when the outlook has been more uncertain, we have seen investors hiding in higher-quality large cap stocks and that has caused valuations to become quite stretched.

"If you contrast that to the mid-cap space, as you go down the market cap spectrum we find a lot of individual stock opportunities where the outlook is very positive, where the potential to deliver strong earnings growth is very significant and where valuations are reasonable. So we think that the mid-cap space is more interesting than the large-cap space."

Structural opportunities

He said he believed there were also structural opportunities in frontier markets.

"One of the appeals of frontier markets is that they are, in many cases, less economically developed and, as a consequence, there are some structural tailwinds that are very supportive of company earnings in those markets.

"So, if you look at financial services for example, in frontier markets those services tend to be quite nascent, quite underpenetrated and we can look forward to levels of future growth that just wouldn't be possible in a more developed market or one of the more mature emerging markets."

However, Teverson believes that, in order for investors to access some of these mid-cap and frontier market investments, it is necessary to take a more benchmark agnostic approach.

He explained: "The benchmark in emerging markets is quite heavily skewed towards large-cap companies, it has a significant element of government controlled companies in that benchmark as well and we see quite significant concentration in a couple of large markets and sectors.

"If you get away from that benchmark and choose the very best high-conviction ideas from across that broader emerging markets universe, I believe it is possible to put together a portfolio that offers not only better return potential but also better diversification of risk as well."

Stock examples

Teverson said there are excellent examples of companies where you have strong structural change playing out that is not currently priced in.

One such business, he said, is Ginko, a Taiwan-listed contact lens manufacturer, which has about a third of the contact lens market in China.

Teverson said the contact lens market lens in China is a relatively young market - noting the percentage of people who need their eyesight correcting who are currently wearing contact lenses is only 7% in China as opposed to around 30% in the more developed Asian markets such as Hong Kong or Singapore.

He explained: "We have potentially a fourfold increase in penetration of contact lens usage in China to look forward to in the coming years now that is a very strong structural growth opportunity and, for a company like Ginko, it doesn't appear to be reflected in valuations currently.

Another example Teverson cited is IndiGo, a low-cost airline in India.

He said: "Air travel is very under-penetrated in India today but as people get wealthier, we expect that air travel will grow exponentially and that is a really interesting opportunity in our view as well."

Investment process

Teverson said having a disciplined investment process is key to selecting such stocks and ensuring such a long-term perspective.

He explained: "We are looking for a clear positive change in a company, evidence that that change is not in the valuation currently and clearly identifiable triggers for that investment to go right for us.

"This discipline ensures we are looking through the short-term noise, we are buying into stocks that are under-appreciated and we can see the route to making money from that investment idea."

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