Gaining alpha in emerging markets: 4 stocks to watch

While China’s and India’s governance structures differ in several important ways, their economies share some common features: consumption is growing, local industrial champions have rising global clout, and their equities are gaining the attention of savvy investors in London and on Wall Street. Yet tapping into the two countries’ stock markets may require going beyond the standard tracker and mutual funds that have traditionally been used to gain exposure to emerging markets (EMs).

While the MSCI EM benchmark index in February quadrupled the weighting of Chinese mainland equities, analysts at Pictet Asset Management have warned against relying disproportionately on index tracking, which can leave investors overexposed to vulnerable “old economy” companies and might not factor in “differing qualities of corporate governance”.

With Indian equities, their level of inclusion in EM benchmarks has not kept pace with increased liquidity and the relaxation of foreign ownership rules, according to a 2018 report by Indian asset manager Axis Asset Management. “The depth and breadth of the Indian equity market … is unlikely to be fully captured by exposure within a global or regional mandate,” Axis said. “The distinctive feature of Indian equities … is the scale and dynamism of the small and mid-cap sectors, which are not fully represented in global benchmarks.”
We examine two Indian and two Chinese stocks whose nuances, both in terms of volatility and growth potential, risk being missed if investors rely on only the benchmark view.

“Differing qualities of corporate governance” - Analysts at Pictet Asset Management on some consituents of EM indices

Suven’s share price up by 18% on “sustainable” earnings

Suven Life Sciences [SUVEN] seemed to start the year on a sour note after the share price plummeted by 21% to INR186 during January. But the stock has since recovered 45% of its value and is up by 18% to INR269 year-to-date. The success of the Contract Research And Manufacturing Services (CRAMS) division has convinced analysts at Dolat Capital that earnings are “sustainable”. In addition, in mid-June, Aditya Agarwala of YES Securities wrote that a successful breakout from trading around INR275 could push the stock to INR295.305.

Adani Power surges on power plant consolidation

Adani Power [ADANIPOWER], India’s largest privately owned power producer, has been in acquisition mode. News of a purchase of thermal plants in the western part of the country from debt-laden competitors sent its share price soaring by 24% to INR63.65 on 1 July. It’s a welcome move for a stock that had previously risen little beyond its level of INR51 at the start of the year. But analysts’ average price target of INR23.43 remains quite low, suggesting that a correction may still be due. Still, Adani Power is only one of the energy-focused subsidiaries in the Adani conglomerate, and news affecting the group and its various companies could in turn affect Adani Power’s stock.

Jinxin Fertility awaits catalyst after productive IPO

IVF provider Jinxin Fertility [1951], which is backed by US private equity firm Warburg Pincus, floated in Hong Kong on 25 June. The stock debuted at the upper end of its IPO guidance, at HKD8.54, raising HKD360m. The shares have since proved highly volatile, reaching HKD9.65 twice after 25 June, but are currently trading 5% above the IPO. Healthcare is a booming business in China – Jinxin’s net income more than doubled to CNY166m between 2016 and 2018 – and stocks in the sector make for a classic defensive play amid the US-China trade war. But soon after the IPO, Arun George of boutique equity research firm GER suggested HKD8.81 is a fair price for the moment and added that the next catalyst may come from H1 results, for which Jinxin is yet to provide a release date. He also noted that peers Viva Biotech [1873] and Frontage [1521] have also settled on trading below their IPO prices, despite having risen in initial trading sessions. 

China Evergrande diversifies into electric vehicles after rollercoaster H1

China Evergrande [3333], the country’s second-largest property developer by sales, has had a volatile first half of the year, with shares having risen by 22% to HKD28.60 in the first three months of the year, but since then falling by over 23% to HKD21.95 – down by 6.4% for the year. The company has been grappling with high debt levels and is aiming to reduce its net debt-to-net book value ratio from 152% at the end of last year to 70% by June 2020. China’s property market has had to contend with a slowdown in sales, leading Evergrande to diversify. The company aims to be the biggest producer of electric vehicles in China and has acquired a stake in the US electric vehicle startup, Faraday Future. However, not all of Evergrande’s diversification efforts have borne fruit. While the group’s new health and tourism arm continues to expand, it has disposed of its dairy, cooking oil and mineral water businesses due to poor revenues.