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Emerging Markets Headline Risk

DAVID SEMPLE: I think China headline risk is a good question to ask because I think it's, perhaps, blindsided people a little bit from what's really going on there. Of course, we focus simply on what's happening with the companies. When we're on the ground, as we are frequently, we get pretty good feedback from them that things are going pretty well. So, don't focus too much on the headlines, it doesn't impact most of our companies, principally because they are domestic demand companies. In other words, companies that are really providing goods and services in the country for the Chinese consumers particularly and not really focused on the export side of things.

And it's also misleading to look at headline numbers for growth as well. Yes, you can say it's relevant for the context within which our companies are working, but the opportunity sets for many of them are just so much larger and divorced from what's happening in terms of one static economic number, which may or may not be true anyway. So, focus on what the individual aspirations ... or the individual companies are doing, and their outcome, from what they're facing in terms of the super-demand that we see in China.

Investing in Domestic Demand: Anta Sports and A-Living

SEMPLE: One of them is a company called Anta Sports. Now, Anta Sports has developed its own brand in China which is somewhere between fashion and sportswear. They're also responsible for the Fila brand in China and they've done an interesting deal where they've (with other people) taken over a company based in Finland, which has some well-known international brands such as Wilson, Salomon, Atomic, Arc'teryx and so forth. And, as they apply that in the China context, I think this is going to be very, very exciting, because one of the aspects of Chinese consumption that has become ... people are very optimistic about, has been sports/sportswear/”athleisurewear”—if that's a word. And they're firmly in front of that. So that's been an interesting company for us and has done well.

Another example would be in the property sector. Now normally for us, property development is a little too cyclical for us to get involved with. There are exceptions to that rule, but generally speaking, it's a little too stop and go for us. However, property management is completely different. Property management is a play on the existing stock of buildings in China and we own a company called A-Living. A-Living is owned partially by two of the largest property developers in China.

So not only are they able to get a constant stream of new properties from their majority owners, but also a stream of properties from third-party developers. Now, it's very “sticky” in terms of the customers, so the property owners find it relatively hard to change property management companies and they have the ability to raise rates over time, particularly for more value-added services to the actual property owners, so-called community value-added services. So, it's a nice, very visible expression of what has happened in China in terms of property development and it looks pretty good going forward.

2020 Market Outlook

SEMPLE: So, in terms of the year ahead and whether we should be looking positively or negatively for the asset class as a whole, I think you have to start from the premise that the headline risk does not go away. What will, I think, inevitably persist is the bifurcation on technology. Quite clearly there is a real impetus in China to develop a lot of their own technology, so I think we can expect that to continue. The asset class probably, therefore, still has a lot of headlines, but there's certainly one aspect I think we have to address in this context and that is the dollar. A strong dollar over the last few years has certainly masked some of the benefits, or some of the results, that have been coming out in local terms for emerging markets. And so I think, looking forward, I don't pretend to be an FX [foreign exchange] strategist, but there are certainly, I think, some grounds for optimism for the U.S. dollar not being as strong, or getting stronger, as it has been in the last few years. And if that's the case I think the emerging markets asset class will do quite well.

There has been some concern about a number of different protests around the emerging markets world, notably in Hong Kong and in Chile recently, other places which are not as relevant for us as EM [emerging markets] equity investors like Bolivia, for instance. But for the time being it's hard to think of the Chinese being heavy handed in this context, but it is true to say the Hong Kong government does not appear to have complete control over the situation. It doesn't really impact what we own in the portfolio. We don't really have Hong Kong-specific companies, but certainly it adds to the general angst about it. So, if a resolution is obtained there, if we get a first phase deal, and maybe move on to a second phase deal in terms of tariff, and if the U.S. dollar is not egregiously strong, I think we'll be all set for a reasonable year in emerging markets.

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