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Pandemic Accelerated Existing Trends

Mawer’s Peter Lampert believes strong sectors, stocks and countries got stronger, while the weak got weaker

Michael Ryval 7 January, 2021 | 1:10AM
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As it did in many markets, the coronavirus pandemic impacted emerging markets equities, causing a big spike in technology stocks and putting downward pressure on consumer discretionary names. While it is quite likely that this trend may continue for some time, Peter Lampert, portfolio manager of the 4-star gold-rated $250.8 million Mawer Emerging Markets Equity Fund – A, is taking an even-handed approach and holds names in both camps.

“A lot of the tech stocks that have been winners this year have really strong long-term fundamentals,” says Lampert, portfolio manager at Calgary-based Mawer Investment Management Ltd. “What the pandemic has done has accelerated those trends, whether it’s e-commerce, or digital adoption across many different businesses. They were on a healthy trajectory, but it’s been turbo-charged and likely to persist. But in some cases valuations may have over-shot,” says Lampert, pointing to high-flying U.S. stocks such as Tesla Inc. (TSLA) and ZOOM Technologies Inc. (ZM).

Strong Got Stronger, Weak Got Weaker
Lampert argues that the market has acquired an almost Darwinian turn, as the strong grew stronger and the weak grew weaker. “Companies such as Alibaba were in a strong position to begin with. It had strong long-term fundamentals and increasing market penetration. On the flip side, bricks and mortar retail and airlines have had a very difficult year. Airlines are a very competitive industry and so are cruise lines, which have been the most impacted businesses. But it’s been especially bad if they were in a tough spot to begin with.”

This has also been evident at the country level. “The best performing countries have been China, South Korea and Taiwan, which also have the biggest exposures in this portfolio,” says Lampert, noting that China accounts for 33.8% of the fund, Taiwan 16.4% and South Korea 16.3%. “They went into the crisis from a position of strength, in terms of having good fundamentals, fiscal positions and good exports. On top of that, they have effective governments so that when the pandemic hit, they managed it very well. They were able to contain the virus and keep their economies going.”

Conversely, Lampert believes that weak countries that were poorly managed and had less effective governments came into the pandemic from a position of weakness. “COVID19 hit Brazil, South Africa and India and they were not able to deal with it. They have not done well, their currencies have sold off and it’s been a difficult year for these countries,” says Lampert, who joined Mawer in 2008 after completing a Bachelor of Business Administration at Wilfrid Laurier University and a Bachelor of Mathematics at University of Waterloo. Manager of Mawer Emerging Markets Equity Fund since its inception in Jan. 2017, Lampert honed his specialization in emerging markets equities when he was based in Mawer’s Singapore office between 2013 and 2015.

In 2020, the fund returned 20.37%, compared to 11.01% for the Emerging Markets Equity category. Over the last three years, the fund had annualized return of 7.40%, versus 4.01% for the category.

Sectors in Focus
Lampert and his team, which includes Josh Samuel and Wen Quan Cheong, own about 50 companies. In principle, they are bottom-up investors and focus on companies with strong competitive advantages, good management teams and good balance sheets. As a rule, they continuously value all the fund’s holdings using discounted cash flow models and estimated fair value range of what they believe the stocks may be worth. As this year’s trend of the strong getting stronger persisted the technology stocks have moved higher in their fair value range, says Lampert. Indeed, he continues to like holdings such as Chinese e-commerce giant Alibaba Group Holding Ltd. (BABA), chip-maker Taiwan Semiconductor Manufacturing Co. Ltd. (TPE-2330) and Chinese internet player Tencent Holdings Ltd. (HKG-0700).

From a sector standpoint, the largest position is about 19.4% in information technology, followed by 15.2% industrials and 15.1% financials.

 “Late in 2019 and early in 2020, and even until the middle of last year, we were adding to many of those tech companies where the fundamentals were strong, and continued to get stronger. But now, many are trading at the higher end of the fair value range,” says Lampert. Meanwhile, weaker companies, such as travel providers and brewers, are trading at the lower end of the fair value ranges. “More recently, we have been adding at the margins, to those types of companies.”

EM Stock Picks
One such company is Heineken Malaysia Bhd. (HEIM), a subsidiary of Amsterdam-based Heineken NV. “It’s a great business. Malaysia is a duopoly as there are only two licensed brewers—Heineken and Carlsberg. Because it’s a Muslim-dominated country there are very strict rules around the industry and it has high barriers to entry,” says Lampert.“But because of COVID-19 breweries were shut down and bars and restaurants had to close, so it’s been a tough year for the company,” adds Lampert. “But as long-term investors, and the fact that we own the stock with a 10-year view, we believe that as the situation normalizes Heineken is very well positioned. We believe the valuation is attractive.” Lampert estimates the stock is trading at a 10% discount to the mid-point of the estimated fair value.

In a similar vein, he likes TravelSky Technology Ltd. (TVL), a Beijing-based firm that provides software booking systems for Chinese airlines. “They have a monopoly in that business, but obviously demand has been impacted. As of September, domestic travel has returned to levels of last year. The Chinese have control of the virus and the economy is back to normal. But international travel has been severely impacted,” says Lampert. “The fundamentals are very strong and the company has a net cash position so they can get through a stressful period. They continue to have a monopoly. And taking a 10-year view, TravelSky is well-positioned.” The stock is trading at a 12% discount to the mid-point of its estimated fair value range.

On the technology side, Lampert favours momo.com Inc. (TPE:8454), the leading e-commerce firm in Taiwan. “There is about 11% penetration by e-commerce of retail sales. And Taiwan doesn’t have a dominant player like an Amazon.com Inc. (AMZN). But we believe that momo.com is best-positioned to be that kind of player,” says Lampert, noting that the firm has seen revenues grow 40% year-over-year.  “They have fantastic management execution and have been consistently gaining market share. And most important, they will continue to grow in a growing market as e-commerce penetration increases in Taiwan,” says Lampert, adding that the stock is trading at a 17% discount to the mid-point of its estimated fair value range.

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Michael Ryval  

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