Good stock selection helps Templeton outperform

TEM : Good stock selection helps Templeton outperform

Templeton Emerging Markets interim figures for the six months ended 30 September came in ahead of its benchmark. The fund delivered a net asset value total return of 8.2% while the MSCI Emerging markets Index returned 6.1%. Shareholders did even better as the discount narrowed so that the share price return was 11.9%.

The manager’s report says the outperformance was driven by stock selection and holding the right currencies. The holding in Tata Consultancy services added 1.2% to the value of the fund and Brilliance China Automotive added 1%. Against that the fund’s holding in SK Innovation took 0.7% off the value of the portfolio.

Talking about these companies, the manager said: “One of India’s largest and oldest IT consulting companies, Tata Consultancy Services, remains a beneficiary of improving trends in global IT outsourcing. We believe that IT outsourcing is a growing business, and Tata is well placed to benefit from this growth due to its extensive global exposure and comprehensive range of services. In addition to benefiting from the strong performance of the Indian market as a whole, strong second quarter results and indications of growth in both demand from international customers and Tata’s market share further supported the share price. We are of the opinion that India has a major competitive advantage in the provision of outsourcing services due to a combination of available technological expertise and relatively low labour costs. 

Brilliance China Automotive is a Chinese car maker noted for its joint venture with German luxury car maker BMW. Resilient sales of luxury cars in China drove strong earnings with BMW cars taking an increasing share of the market segment. News of an extension of the joint venture agreement between Brilliance China and BMW to 2026 also buoyed the share price. We believe that Brilliance China’s capacity expansion plans coupled with its strong brand recognition and execution could allow the company to continue enjoying growing demand and rising market share. We remain confident in the superior engineering of the German partner, BMW, as well as the brand’s increasing popularity in China. Of the approximately 18 million private cars sold in 2013 in China, less than 2% of them were BMW. We believe that the long-term demand growth is intact and the management of Brilliance and its joint venture company are capable of executing their business plans to gain further market share.

South Korea’s largest oil refiner, SK Innovation, reported disappointing second quarter results due to a decline in refining margins resulting from lower oil prices and demand, the shutdown of one of its gasoline-making residue fluidised catalytic crackers for maintenance, foreign exchange losses due to a stronger won, and lower profits from the petrochemical division as a result of weak paraxylene prices. Taking a longer term view, the company is trading at attractive valuations, and is well positioned to benefit from a recovery in product prices as well as product demand due to its dominant market position. An expansion of petrochemical and lubricant capacity could also result in better earnings in the longer term. SK Innovation is ahead of regional competitors in the conversion capacity of its refineries and is able to derive better refining margins than those competitors. As the demand for high grade and environmentally friendly products increases, SK Innovation is well positioned to meet that demand.”

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