TOM Ewing is the engaging and energetic manager of Fidelity’s UK Growth fund, which has over half a billion pounds under management. The 34 year old scours the country looking for undervalued companies that are able to tap into the increasing wealth of consumers in emerging markets. From the powerhouses of the FTSE, down to smaller companies in niche sectors, Ewing sees much to be optimistic about.
UK companies are not the flavour of the month, but this leaves opportunities for a stock picker. Ewing believes that just because the retail sector in the UK is looking bleak now, investors should not be pessimistic about all UK companies. With emerging markets developing apace, he sees an opportunity to export our tertiary edge. In his regular meetings with UK companies, he looks for how his fund can profit from their access to these trends.
Rio Tinto and BHP Billiton, with their access to the massive iron ore deposits in western Australia, are cashing in on the demands of emerging markets. Ewing says Australia’s deposits are a better grade than China’s, so they will be able to continue to mine at a lower cost. He thinks oil companies will also profit, despite the tax on oil and gas companies announced in the budget. He thinks financial service companies are tricky investments though, because “the shadow of regulation looms large, making it difficult to get an edge.” Despite these uncertainties, Ewing thinks the value of the UK in upholding the rule of law and its corporate governance is underplayed.
Ewing believes the UK’s service sector is particularly strong. Due to our custom of outsourcing core functions to create shareholder value, we have a highly developed service sector. The press is often consumed by the belief that we don’t make anything, but in services we are world leaders. For Ewing, the staffing companies Michael Page, SThree, Robert Walters and Hays are great examples of this. They are able to utilise the beachhead created by multinational companies in the developing world. WPP, a world leader in advertising and marketing services, is another pick for Ewing. He thinks it has a great Chinese business and with consumers expanding purchasing from rice and heating to cars and chocolate it is well placed to be the company to sell these goods to them. The UK is also a world leader in online retail, skills that can be invested in within retailers or in pure plays like ASOS and Ocado. “These aren’t massive industries, but these competencies just don’t exist in India, China and Brazil,” says Ewing.
A UK-listed company in which Ewing sees considerable potential is Diageo. “In the last year, Diageo has pretty much sewn up the scotch industry.” Ewing’s thesis is convincing: “The scotch that is going to be drunk in the bars of Mumbai, Delhi, Shanghai and Chengdu in 18 years time, is today coming out of the taps of Diageo’s distilleries.” He also likes Pearson because of its overlooked education function. Its key competitors are owned by highly leveraged private equity companies, while it has “invested in the content and delivery of education through software and technology in a way that no other company is really doing.” With every country focused on improving education outcomes, Pearson will be able to tap into this demand. Another interesting pick from Ewing is Mothercare. It is not very trendy in the UK right now and suffered from the disruption caused by the snow. However, in India, China and the Middle East it is a luxury brand, benefiting from its western brand status and franchise business model. It should be able to cash in on increasing disposable incomes.
Ewing is able to invest 20 per cent of his fund outside of the UK. He currently has around 15 per cent beyond these borders. His favourite bet is China, which he visits at least once a year. Rather than staying in Shanghai, Beijing and Hong Kong, to see the real trends he advises investors to get out of these international cities. When visiting last June, the growing disposable incomes of lower wage earners was clearly the new story. As such, companies such as Great Wall Motors, China’s largest SUV maker, look good. Ewing explains that Chinese consumers generally prefer bigger cars. The global head of Inchcape told him in Hong Kong that the bigger cars suit their social lives, reflected in the number of people you see at the larger restaurant tables across China. Ewing got a bargain, buying the stock at seven or eight times earnings.
Many lament the failure of the UK’s ability to compete with the manufacturing power of Germany. However, Ewing finds many UK companies worth championing. Perhaps when China’s engineering companies surpass their German competitors the UK’s position will look comparatively superior, especially if those same Chinese companies are employing the UK’s service sector to sell their products. Especially if the end of a hard day, they choose to relax with a glass or two of scotch.