VP's EM bottom fishing checklist (part 3)

What to buy

This is the last part of our short series on EM crisis investing; we highlight our framework to screen for EM investments. The below is an excerpt from our March 30th report to VP clients.

Demographics tailwinds + capital-scarcity + crisis signposts = EM multi-baggers

VP’s demographics framework hones in on the best hunting grounds for multi-year growth potential.

The key insight from our demographics framework: the demographics dividend and the quality of institutions are jointly important in explaining future economic growth and equity returns.

Source: African Union Commission, Acemoglu and Robinson

We tested a vast range of demographic and institution inputs and found the best ones: female employment, births, internet penetration, air traffic, dependency ratio, and private credit.

Our Capital Cycle scores point to the most capital-scarce areas where limited competition can enable future profit growth. EM as a whole is very capital-scarce relative to the US, setting up the potential for multi-year outperformance.

A quick reminder that VP’s Capital Cycle is our highest-conviction equity framework. We aggregate up fundamental data across every listed stock to understand whether an industry’s asset base is growing/shrinking and whether companies are able to deliver increasing returns on capital.

For VP clients we highlighted EM companies to buy once crisis signposts are aligned. Our screening criteria: 1) in a capital-scarce sector, 2) high demographics score and domestic-facing business (proxy for growth potential), 3) large drawdown in fwd EPS estimates, 4) composite of valuation metrics are low. 

Key observations: many of the businesses that passed the screen were consumer-facing businesses:

• Telecoms: as we found in our Age of Scarcity + capex supercycle thesis, lots of infrastructure businesses like telecoms are capital-scarce across the world. They offer a steady stream of inflation-linked cashflows and are takeover targets for global P/E and infrastructure funds.

• Retailers: many businesses operating in this space show relatively low margins, but are able to produce high returns on capital thanks to high asset turnover.

• Food, beverages & tobacco: generally these companies operate with very limited competition due to intense industrial concentration and are excellent candidates for demographics tailwinds.

Get the full picture at variantperception.com

Source: S&P Global, Datastream, Refinitiv, Macrobond, Variant Perception