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The top turnaround stories among 22 tumbling EMs

Martin Currie's A-rated Kim Catechis picks the winners and losers after a turbulent year for emerging markets.

Citywire A-rated Kim Catechis of the Legg Mason Martin Currie EM fund rates the propects of 23 developing nations and selects his top turnaround prospects.

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Citywire A-rated Kim Catechis of the Legg Mason Martin Currie EM fund rates the propects of 23 developing nations and selects his top turnaround prospects.

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RUSSIA

Performance year-to-date (US$): -2.5%

Investment outlook: The economy is coming out of a recession with good quality companies intact; oil price rise has not filtered through to earnings yet and the equity market still has the highest yield in emerging markets (EM).

House positioning: We are marginally underweight – we find attractive opportunities in the energy and banking sectors.

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PERU

Performance year-to-date (US$): -2.7%

Investment outlook: An open economy with the best demographics in Latin America, Peru’s new president Martin Vizcarra has moved to entrench a technocratic government and we expect a large infrastructure plan to boost growth.

House positioning: We are overweight via our holdings in the leading financial sector franchise and a highly efficient copper producer. Recent results point to a rebound in consumer confidence and loan growth, in a clearly underpenetrated financial services sector.

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BRAZIL

Performance year-to-date (US$): -3.5%

Investment outlook: Inflation and interest rates continue at lows, business confidence is picking up and companies are investing. Large, liquid market with substantial local investor base. We expect the economic recovery to continue into 2019.

House positioning: We are still underweighted the market – we believe that the fragmented congress will make delivery of reforms tougher. We hold investments in banking, energy (downstream), low-income housing and logistics businesses which we believe will be major beneficiaries of the recovering economy.

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CZECH REPUBLIC

Performance year-to-date (US$): -5.6%

Investment outlook: Pragmatism is the hallmark of Czech economic policy and despite PM Babis ’personal difficulties, it is essentially business as usual. The country’s high correlation with German industrial production provides a strong underpinning to the medium-term outlook.

House positioning: We have no investments in the country as we have not identified strong enough opportunities. 

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THAILAND

Performance year-to-date (US$): -6.6%

Investment outlook: Exports recovery is leading to broader economic recoveries, boosted by continuing strong tourism spending. Fiscal policy is supportive going into the election year. Corporate balance sheets are generally healthy.

House positioning: We have no investments in the country as we have not identified any opportunities that would be attractive enough for our time horizon.

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UNITED ARAB EMIRATES

Performance year-to-date (US$): -7.6%

Investment outlook: A resilient economy despite its oil dependency, but with lower growth than the EM average and increasing political risk. Enjoying a short-term boost from the resurgent oil price.

House positioning: We have no investments in the country as we have not identified any opportunities that would be attractive enough.

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HUNGARY

Performance year-to-date (US$): -9.1%

Investment outlook: Economic policy is pragmatic and Hungarian industrial production is highly correlated to Germany’s and domestic demand is picking up. The Forint’s recent weakness suits the government, as EU fund flows are in Euros and 70% of state debt is Forint denominated.

House positioning: We are significantly overweight by virtue of our single holding in the premier financial sector franchise, which is overcapitalised and is growing via a footprint across Eastern Europe into the faster growing markets of Bulgaria and Romania.

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Malaysia

Performance year-to-date (US$): 9.5%

Investment outlook: Better terms of trade and growth in tourism, alongside higher oil prices are all positives. PM Mahathir Mohamad will aggressively attack infrastructure overspend and scrap opaquely awarded contracts.

House positioning: We are half weighted compared to the market, through our holding in a strong cash flow generating gaming and entertainment company.

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COLOMBIA

Performance year-to-date (US$): -10%

Investment outlook: New president Ivan Duque is well placed to build a working coalition in congress but will probably struggle to cut taxes as promised and enact reforms. We are constructive on economic growth for 2019.

House positioning: We have no investments in the country as we have not identified strong enough opportunities. The peace dividend requires higher corporate taxes to pay for the integration of the guerrillas. The outlook for government finances depends on oil prices. 

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EGYPT

Performance year-to-date (US$): -11.4%

Investment outlook: Rescued by an IMF plan last year, Egypt’s limitations are exacerbated by sclerotic reform process. We expect policy continuity.

House positioning: We have no investments in the country as we have not identified strong enough opportunities. 

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INDIA

Performance year-to-date (US$): -12.8%

Investment outlook: Economic and earnings growth should pick up after the demonetisation and GST [general sales tax] reforms. The global environment is more supportive with lower oil prices. Government sector is focused on fiscal stimulus, with elections in mind.

House positioning: We are overweight the market, with exposure to the private sector banks, the consumer and the auto sectors.

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TAIWAN

Performance year-to-date (US$): -12.9%

Investment outlook: Highly correlated to the international technology sector and a major beneficiary of new investment in AI and heterogeneous computing. Geopolitical risk is rising, with Taiwan caught between China and the US.

House positioning: We are fully weighted, with our exposure in leading technology hardware and insurance/ private banking opportunities.

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INDONESIA

Performance year-to-date (US$): 13.4%

Investment outlook: The country’s finances are improving and domestic demand remains strong, inflation is weak and stronger commodity prices are helpful. Elections are now due in 2019.

House positioning: We are equal weighted and are positioned in a leading telecommunications infrastructure company.

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CHILE

Performance year-to-date (US$): -17.4%

Investment outlook: President Pinera’s growth-oriented centre-right administration has recognised that it cannot deliver its campaign promise of lowering taxes, due to fiscal constraints and the need to finance social reforms. It will simplify the tax system and impose an ecommerce tax on for multinationals that operate in Chile. 

House positioning: We are now absent, having sold our holding in the dominant financial sector franchise, due to its strong run and now full valuation. A sluggish economy and well-developed banking system offer little scope for positive shocks to our thesis over the coming year.

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CHINA

Performance year-to-date (US$): -18.4%

Investment outlook: Growth slowing, but concerns overdone. Great results coming through for the tech/e-commerce sectors. Focus on deleveraging remains, reducing asset quality risk for banks. Cybersecurity reforms accelerated and trade war measures ready for deployment.

House positioning: We remain fully weighted, but almost exclusively in the technology/ consumer names. We avoid highly leveraged, old economy SOEs [state owned enterprises] but prefer robust business models in energy and insurance.

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PHILIPPINES

Performance year-to-date (US$): -18.9%

Investment outlook: Improving finances, increasing liquidity and significant FDI [foreign direct investment] for infrastructure projects coming in 2018-19, bode well for consumer spending. Focus is on fiscal reform and currency weakness.

House positioning: We are marginally underweight and our investment is in a leading multi-format retailer that is a beneficiary of infrastructure investment outside of Metro Manila, the capital.

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MEXICO

Performance year-to-date (US$): -21.2%

Investment outlook: The country is at a political turning point, having just elected the first left wing President ever. He will be able to form a majority in Congress but unlikely to breach the 2/3 threshold required for constitutional changes. The economy is synchronised with the US and is showing resilience in consumer demand and manufacturing. 

House positioning: We are marginally overweight via our preference for high-quality opportunities in the liberalised energy sector, as well as in the significantly underpenetrated financial services sector.

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SOUTH KOREA

Performance year-to-date (US$): -22.2%

Investment outlook: The new President still driving expansionary fiscal policy. Corporate governance improvements and a domestic consumption recovery bode well. US, North Korea and China geopolitical tensions easing, so China offering enhanced free trade deal in services and investment.

House positioning: We are fully weighted, specifically in the technology, consumer and specialty chemicals sectors, where we see a combination of improving shareholder-friendly policies and exceptional profit growth potential.

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SOUTH AFRICA

Performance year-to-date (US$): -26.6%

Investment outlook: Sentiment has improved with new President Cyril Ramaphosa fighting corruption and staving off rating agency downgrades. However, ANC party infighting will hinder progress and divert attention short term.

House positioning: We are overweight this market. Our largest position is in Naspers, the premier EM internet incubator, a founding investor in Tencent. The company has significant holdings in top internet players across EM.

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PAKISTAN

Performance year-to-date (US$): -28.0%

Investment outlook: Economic growth is exceeding 5%, at least partly thanks to China’s One Belt One Road policy, which is building transportation, electricity generation and logistics infrastructure costing $64 billion. FATF [Financial Action Task Force, an international laundering watchdog] added the country to its ‘grey list’ which means it has not done enough to curb terrorist financing.

House positioning: We have no investments in the country as we have not identified strong enough opportunities. 

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GREECE

Performance year-to-date (US$): -37.4%

Investment outlook: The economy is growing again after a long recession and NPLs [non-performing loans] are improving. After over eight years and three bailouts, Greece looks stable at last.

House positioning: We have no investments in the country as we have not identified strong enough opportunities. 

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TURKEY

Performance year-to-date (US$): -42.4% 

Investment outlook: A resilient economy despite its oil dependency, but with lower growth than the EM average and increasing political risk. Enjoying a short-term boost from the resurgent oil price.

House positioning: We have no investments in the country as we have not identified any opportunities that would be attractive enough.

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Kim Catechis
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