A FONDS exklusivinterview with Jürgen Maier, fund manager of Raiffeisen-Nachhaltigkeit-EmergingMarkets-Aktien.
FONDS exklusiv: A decade of outperformance up until 2010 was followed by underperformance versus the equity markets in the industrialised countries. For the last few months, the stock exchanges in the Emerging Markets (EM) appear to be stabilising, with a modest gain. What do you think about the prospects going forward?
Jürgen Maier: We are confident that the outlook will improve. A look back at developments in the past also suggests that there will be another cycle in which the Emerging Markets will perform significantly better again. But certain conditions must be in place for this to occur.
For example?
One important aspect would be a slightly weaker US dollar. Because – in conjunction with high interest rates – a strong dollar means that US investors in particular prefer to invest in their own country. This is especially true when the global economy is weak. In this case, major investors withdraw large amounts of capital from Europe and the Emerging Markets, which are then no longer available for investments.
At 30 per cent, China is the most strongly weighted market in the MSCI EM index*. What role does it play?
China remains very important. But the country has faced some difficult problems. For example, scrapping the one-child policy did not boost the birth rate, which would be desirable from a demographic perspective. In fact, the birth rate has continued to fall. We have also seen major turbulence in the real estate sector, which has resulted in a consolidation among private providers. And China’s draconian measures to fight the pandemic, including locking citizens into their own homes, also pummelled consumer confidence, which has still not bounced back yet. One of the few positive developments has been the recent export success by Chinese manufacturers of electric vehicles, which has triggered a response by the European Union.
In light of all of this, what’s your assessment of China?
Valuations for many Chinese securities are looking favourable now, and consequently we have built up some positions in the fund for a while. Possibly a bit early, but there are good chances that we can achieve above-average performance over the next three to five years. After all, a lot of negativity has already been priced in. So there only has to be a modest turnaround in sentiment for large investors to start investing more heavily again and for a more positive trend on the Chinese equity market.
But if a global crisis escalates, for example due to a possible conflict between China and Taiwan, the stock markets might crash. Are you able to prepare for such situations in the sense of risk management?
That’s an important point for us. We have formed a team that carefully monitors the geopolitical developments between China and Taiwan and discusses them regularly. There are scenarios with various levels of escalation which could ultimately lead to us reducing our positions or selling off assets completely. Naturally, these kinds of crisis scenarios can never be fully ruled out. That said, at the moment we do not expect things to move in this direction and we do not identify any elevated risks in this regard.
Why does China nevertheless play such a major role in your fund?
China now has a weighting of around 27 per cent in our fund, making it the most important EM market for us. The gradual increase in the positions in China is not motivated solely by the attractive valuations. Generally speaking, the number of sustainable companies in China has clearly increased over the years, and this is also reflected in a significant improvement in corporate reporting on environmental, social, and governance standards, i.e. ESG aspects.
What’s behind this positive trend, Mr Maier?
In recent years, shareholder engagement activities by Raiffeisen KAG, external providers such as ISS and MSCI, and institutional investors from Scandinavia have prompted companies – not just in China – to provide more of the data we need for our sustainability assessments. As a result, since the inception of the fund, our investment universe has increased by more than a hundred firms to around 500 names, all of which comply with our strict sustainability criteria. And we apply the same high ESG standards to EM companies as we do for companies in Europe and the USA. For instance, Raiffeisen-Nachhaltigkeit-Emerging Markets-Aktien is not invested in the companies Samsung Electronics and Alibaba, both of which have relatively high ratings from external providers. In the case of the Korean tech giant, the reason for this is conflicts with the unions and a case of corruption in the past, whereas for the Chinese Internet company the reason is labour conditions in the logistics centres.
Could you briefly outline the investment process that you use? How do you pick investments?
Out of the 1,400 names in the MSCI EM index, about 1,000 companies currently provide us with all of the data we need to be able to conduct a sustainability analysis. Investment is excluded for about 20 per cent of the companies because they violate one or more of our strict negative criteria, including the production of oil and gas, the production and generation of energy from coal and nuclear power, violations of labour and human rights, corruption, and balance sheet fraud. Additionally, we use an internal rating system, in which the remaining companies are analysed and assessed with an ESG corporate indicator and have to achieve a minimum score. This then rules out about another 30 per cent of the companies. Furthermore, the results from shareholder engagement are also assessed and analysed by our Zukunfts-Themen teams, which provide important input on sectors such as energy, infrastructure, technology, and mobility. Ultimately, we have about 500 companies left, which are then analysed on the basis of fundamental criteria. At the end of the investment process, the fund portfolio consists of around 80 to 90 names.
What do you see as particularly promising topics right now?
In India, which we are very confident about over the medium to long term, we are quite keen on financial enterprises which provide loans for affordable housing, such as HDFC Bank. In Indonesia, we have a position in Bank Rakyat, which extends microloans to help people develop independent livelihoods. From a sustainability perspective, IT outsourcing in India is also very interesting. Companies such as Tata Consultancy Services were among the first to establish maternity leave policies in India, which now serve as a role model for other industries there. The business strategy “China plus One” also has very positive effects. In terms of supply chains, this refers to the efforts to avoid the construction of new production facilities in China and to shift such facilities to other regions such as India or Mexico, for example.
Source: FONDS exklusiv
*The MSCI Emerging Markets Index comprises equities of approx. 1,200 companies with high and medium market capitalisation from 26 Emerging Marktes.
The fund exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possibel to rule out loss of capital.