Welcome to Morningstar's "3 Stock Picks". I'm Holly Black. With me is Austin Forey he's manager
of the JPMorgan Emerging Markets Fund. Hello. Good morning.
So you've got three stocks for us today with an emerging markets theme,
unsurprisingly, where should we start? So I'm going to give you first of all,
a company called Weg. It's a manufacturing company, it's Brazilian unusual to find a
really successful manufacturing company in Latin America. And they make electric motors. And
in fact, about to celebrate their 50th anniversary later this year, so it has been going a long time.
It's a big global player. It's got factories in four continents, I think, and it sells all
over the world. And we like the company, I guess, for two reasons. Firstly, really sort of serious
corporate culture, very good focus on the way that executives get remunerated and incentivized.
Big focus on value creation, and rather Germanic culture in the organisation,
which may sound strange, but actually, one of the founders was from German descent. So it's
a bit like a German company transplanted to somewhere more tropical with better weather.
So that's the first stock. And then the other reason I should say that we like it is electric
motors are a big natural indirect beneficiary of the whole drive towards decarbonisation. So
you'll see more and more electric motors in a wide range of applications. And that plays straight
into the core of what of Weg produces And as you say it sells all over the
world. That's quite unusual for a Brazilian company, I tend to think
of them as being more domestically orientated. Yeah, I mean, it manufactures products, motors,
other electrical components. And, that's a global marketplace. So it has to compete head on with
companies like Edison from the U.S. and Schneider from Germany. And I think one of the nice things
about export companies in general is they have to be good enough, because nobody needs to buy
your products if they're not good enough. So it raises the bar and Weg's done a great job over a
long time, not just in domestic in Brazil, but exporting and growing elsewhere too.
And what's stock number two. Okay. So stock number two is a business called
Guangzhou Kingmed Diagnostics. And as the name suggests, it provides diagnostic testing services
for healthcare in China, which is where the company is from. And just to give you
a little explanation on that, if you go and have a blood test, or some kind of other medical test
done in a hospital in the West that test will probably be sent to a third party laboratory
for the actual test to be conducted. So it's an outsourced service.
In China, most of those tests are still done in house in the hospitals, which means
they have less volume, it's more expensive, it's less efficient, and so on. But what you're
seeing is the rise of an outsourced service business model there. In exactly the same way
that's happened in the U.S. and in Europe. And I think there's a very long runway for growth
because of that. And so that's a nice illustration of what's going on in China, where
the service industry has really taken over as one of the drivers of economic growth. And these
kind of niche specialist companies can sometimes have an extremely bright future ahead of them.
Okay, and what is our final stock? Our final stock is called United Breweries.
You can't get that far along with beer companies and United Breweries is the leading beer company
in India. 50% market share owns the Kingfisher beer brand, which may be familiar to some people.
And I'd like to talk about the stock for two reasons. Firstly, it gets a good illustration
of patience, and how you need to think about what really matters, and what's actually not
that important. You know, we bought the stock originally 10 years ago, 11 years ago, in fact,
and the chief executive was a notorious playboy. He was the son of the founder, he was running the
business extremely badly, but the basic asset was exceptionally valuable. And it's really
rare to find a consumer branded company with 50% share of a really underdeveloped market.
And the long and the short of it is he eventually over leveraged himself,
lost control of the company it's now a subsidiary of Heineken. So the western multinationals have
come in, the governance has changed, the operating standards have changed. And that's a business that
is just far too small in the long run for the opportunity that's in front of it. So we think
it has many decades of growth ahead of it. And that's the kind of thing we're looking for.
And this is beer, big money in India, I tend to think it's growing in a lot of emerging markets,
but you don't hear about it so much in India. Beer is a difficult industry in India, you know,
there's no point denying it. And I think there's two reasons for that. Firstly,
it's not as socially embedded as perhaps it is in countries like the U.K. You know,
when we bought the stock, there were as many licenced outlets in the whole of India for
1 billion plus population, as there were in London, that may be telling something.
A lot in London. …British too, but I think that what
you see is a desire for leisure and having fun with your friends and going out to bars. So the
kind of things that eventually lead to much more consumption are probably in place, the regulation
will probably need to change a little bit over time. But originally we paid $1 billion market
cap for the company. And that's just tiny when you think of how much of the global population
you're covering with that kind of footprint. Austin, thank you so much for your time.
You're welcome. For Morningstar I'm Holly Black.