Contrarian Investor Tops Emerging-Market Peers on ‘Wacky’ Ideas
(Bloomberg) -- Richard Sneller says the key to trouncing 98 percent of his emerging-market peers since 2013 is to support -- and even encourage -- "wacky" investment strategies.
In the late 1990s, he said, steel industry veterans called him a "madman" for betting that production would rise much faster than 1 percent annually. Then Beijing deregulated the home buying process, and steel demand surged. In early 2009, as many analysts wrote off Chinese equities, Sneller piled into shares of the tech behemoth Baidu Inc. ahead of its quadruple-digit rally.
Today, the Baillie Gifford & Co. money manager says he has another contrarian view: Oil producers will remain dominant throughout the next decade, even as electric vehicles and alternative fuels increase in popularity. Once again, Chinese demand will come to the rescue, helping elevate oil prices, according to Sneller, head of emerging-market equities at Edinburgh-based Baillie Gifford, which oversees about $255 billion.
"There are times where there’s something so outlandishly irrational and illogical and most unlikely to happen," Sneller said. "But it’s through those opportunities that you can make enormous returns."
The 46-year-old London native said he’s scooping up shares in oil companies such as China Petrochemical Corp., Petrobras and Premier Oil Plc., which should benefit from higher crude oil prices. Sneller also sees opportunities in Indian and Russian stocks as well as technology companies including Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Company Ltd.
"We take three steps back, take a deep breath and ignore most of the noise," he said. "We focus on the core reason for owning this company that you think over the next five to 10 years will deliver returns."
TSMC looks attractive given its role as the supplier of silicon chips to some of the world’s largest companies. The chips will become more relevant with the rise of personalized healthcare, autonomous vehicles and blockchain, according to Sneller. Baillie Gifford bought the stock in 1995 and has hung on to it for much of the past two decades as it soared more than 400 percent, he said.
"We’ve owned this company for a long time and it’s made us many, many, many multiples, but we still think it’s a fantastic long-duration growth opportunity," Sneller said.
Here’s what else he had to say:
On big opportunities in oil industry
"You won’t find many people saying oil prices will be $80 to $100 over the next five to 10 years. You’ll find a lot of people saying that it’s the end of the oil age. That we’ll end up with peak demand sometime in the 2020s. We don’t agree with any of that."
"This inflection point in Chinese demand will happen at some stage in the next three to five years. Timing it is a mug’s game. We’re not trying to time it. So if in two years, oil prices are at $60 but we’re starting to see Chinese gasoline demand accelerating from 13 or 14 percent capacity of vehicles to 15 to 17 percent, that’s the thesis."
On controversial companies and ESG
Petrobras "is hated on account of the amount of corruption it’s been involved in. Now, we don’t condone corruption, but we do believe in our approach to ESG that the very best way to improve the world is to go into the messy situations and improve them. Anyone can go and buy a portfolio of 50 very polished companies that do the right thing, but that doesn’t improve the world per say."
"People are fed up with corruption, pollution, with crime. Every country has its turning point. In Brazil, we’re not there yet, and that’s where hopefully the election of someone like Jair Bolsonaro will act as a change."
On giving up long-term pick, trusting younger colleagues
"Fundamentally, Walmex is not a company that’s ever invested in anything. It knows nothing about its customers. It acts as a sleeping monopolist. The thesis that’s being put to us by (our junior colleague) is that this is bad news long term. Mexico is on the cusp of youngsters wanting to embrace new technologies. They will disrupt sleepy organizations that have relied on the lack of innovation in economies. That thesis is playing out in a number of emerging markets."
On the future of trade tensions
"When it comes to the U.S. and China, we have to understand that Xi Jinping is operating in the context of a history that’s 10 times longer than the U.S. It’s a country that was not treated well. One could say that China’s been very conciliatory towards these former powers. It seems to have taken a fairly grownup approach. When we move into this strange new world, as was the case in 1945 with the U.S. and Soviet Union, we seem to be moving into a similar bilateral relationship."
"Why is it a bigger issue today than yesterday? China has made dramatic advances in the AI space, which of course is a critical component for economies in 20 or 30 years time, in the same way that the Space Race was deemed to be in the 1950s through 1970s."
On where investors are overly bearish
"Chinese Internet names like Alibaba and Tencent -- some of that exuberance has come out and we feel far more comfortable where valuations are today. We think they’re very long-term great stories."
On potential opportunity in Turkish ‘disaster zone’
"There are a number of construction projects that are likely to go sour. Having said that, in every disaster zone, there’s opportunity. We’ve identified one company (Valeura Energy Inc.) that we think, if it’s successful and it’s a very low likelihood of success, could create a change in Turkey’s vulnerabilities, most significantly, energy dependency."
Valeura "could totally eliminate Turkey’s energy dependency. That would radically transform the prospects of the country. What we’re talking about is exactly what you were talking about in Texas with the advent of shale."
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