A sub-fund of the Federated Hermes Global Emerging Markets Equities strategy investing across emerging markets except for China.
Reasons to invest
Emerging markets ex-China offers exposure to consumption, resource and technology themes
More than half of the world’s population lives in emerging markets ex-China representing about one fifth of global GDP. Beyond China, most emerging markets benefit from positive demographics, an expanding middle class, developing digital sectors and significant opportunities in infrastructure.
In addition to the secular drivers of consumption and technology, emerging economies ex-China control huge reserves of key commodities, such as green metals, that are vital for the transition to net zero. While macro challenges remain in a few areas, overall vulnerabilities are limited, and ongoing reforms are likely to strengthen the case for emerging markets ex-China in years to come.
GEMs ex-China aims to mitigate any geopolitical and ESG risks related to China while benefiting from the vast growth potential across emerging markets.
Why GEMs ex-China Equity?
Local emerging market investors typically look out six to 12 months, and thus are more oriented to news flow, quarterly earnings and short-term catalysts. As a result, companies can be mispriced due to transitory issues. This can create opportunities for investors who are able to focus on the long term. We are long-term oriented, which aligns us with company management.
We seek to take advantage of short-term weakness in high-quality companies or mispricing in average companies. While today the portfolio is positioned in quality stocks with a growth bias, we are beholden to neither growth nor value, meaning we have the flexibility to invest where we believe the best opportunities are.
How we invest
- Structural changes in the world economy are transforming emerging markets.
- The winners that emerge from this transformation will be efficient and sustainable businesses.
- This is a long-term trend requiring a long-term approach.
- Quality companies trading at attractive valuations, in countries with conditions supportive of growth, provide the best investment opportunities.
- Investing in lower-quality, significantly mispriced companies can be a catalyst for the realisation of value.
- The best way to add value for investors is through a process that integrates top-down analysis with bottom-up fundamental stock selection, augmented by ESG analysis and engagement.
Ideas are generated from a variety of sources, including meetings with company management, our global network of contacts, broker research, industry analysis and quantitative screens.
A proprietary quantitative model ranks companies on valuation, quality, and momentum factors. This screen assigns favourable scores to quality companies with a stable shareholder base and a strong management team. We identify approximately 200 companies for a watchlist.
We pay particular attention to the following investment criteria:
Value with catalysts
Margin of safety
Avoiding unsustainable sections
Proven business models
Strong balance sheet
Consistency of, and improvements in, revenue and earnings
Large discount to intrinsic value
P/B justified with strong or improving ROE
Improving revenue, margins, cash flow generation
Low PEG ratios
An improving cycle or, at least, the trough of a cycle
We seek to establish a company’s financial health and long-term prospects. We model financial forecasts (one- and five-year earnings), cash flow and balance sheet. We combine this with the analysis of operational, financial and ESG risk factors to estimate the intrinsic value of the company.
We believe concentrated portfolios are best equipped to maximise risk-adjusted returns. Typically, we hold 40-60 companies in a portfolio, with the top 20 holdings accounting for more than 60% of the portfolio.
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