Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Ed Lam, Manager of the Somerset Emerging Market Dividend Growth Fund.
Hello Ed.
Edward Lam: Good morning.
Wall: It has not been a great year for emerging markets. I suppose the big question is, are the fundamentals still strong and has this been sort of overplayed or are there genuine reasons to be concerned when investing in emerging markets at the moment.
Lam: I think obviously it's been very difficult. I think long term all of the key drivers that we should be optimistic about emerging markets are in place. Valuations are even lower than they were and after the correction. More importantly we still see a lot of strength in the underlying companies.
So, earnings locally actually are quite strong and then I think the big thing that is held back or impacted emerging markets is actually frankly Trump foreign policy which has had a much bigger impact than we certainly expected. And if you look around just taking one specific example, but if you take a market like Russia and you look at the banking system there.
Things actually look really good, non-performing loan levels are coming down, lending is actually accelerating, but there is just massive political overhang. Which means that these sorts of stocks are trading at valuations half of what really, we think they should be.
Wall: You can't ignore things like that, can you? I mean as a stock analyst you can look at a fund's balance sheet and say it's – stocks – rather bearishly – rather say things are going well – the dividend may be covered. But even if the fundamentals are all strong, Trump making ever more volatile decisions does have an impact on share prices. So how does that influence the way that you run a fund.
Lam: It has a massive impact. We try to deal with that in portfolio construction. So, we try to diversify risk, not having too much in politically sensitive countries. One of the things that – one of the places we are adding to now is India and that’s partly because we think there is less overall political risk. If we look at what Trump has been talking about and where he is focused. He is very focused on China. He's quite focused on Mexico and NAFTA. But certainly, he seems to not really be interested in India which is great. So that’s certainly an area we are adding to.
Wall: And how does a dividend strategy influence those decisions, presumably if people are choosing to reinvest those dividends. It does smooth some of the volatility that can be associated with emerging markets and has been this year. As a stock selector do you see certain characteristics in dividend stocks which makes them more protected from some of this volatility.
Lam: It should do. I think in the long run it does. In the short term we haven’t really seen that protection. I think partly because it's been so uncertain as to where particularly Trump is going to hit next. And we've seen two bankruptcies of companies that have essentially been politically driven. So that’s – risk of bankruptcy.
So Rusal in Russia and then ZTE in China both politically motivated and attacks on a particular company. So I think what investors are concerned about is even where you see good strong companies with reliable cash flow streams there is an overall much higher level of uncertainty.
Wall: And you've mentioned country specific concerns or opportunities even, are there any sectors that you are wary of at the moment because of this kind of political overlay.
Lam: Yes, so it's actually less sector specific and more country specific. So, we're actually quite comfortable being invested in more global sectors, so oil and gas and things like that, that are less – I think there is less that Trump specifically can do to target whole sectors. But he's been quite specific with regard to countries whether it's North Korea or Turkey or Russia and areas like that.
Wall: Ed, thank you very much.
Lam: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
