Patricia Perez-Cotes’ top picks: September 19, 2022

Patricia Perez Coates, Portfolio Manager, PenderFund Capital Management

Focus: Emerging and global markets

Market Outlook:

Despite the recent macro setbacks in both Europe and North America, we are seeing several significant positive macroeconomic signals in several Emerging Market (EM) countries which we believe provide a less volatile outlook for the next six months.

  • Inflation – We have seen for several months already, either a stabilization or a downward trend depending on the country. For example, in the past few days, China has reported inflation levels that have continued to subside. In Brazil, inflation has generally been largely contained, although it continues to rise. As we have commented in the past, emerging market central banks have been, for the most part, raising interest rates well ahead of advanced economies. This led us to expect that the emerging market rate cycle is approaching its peak.
  • Growth – There is no doubt that lower projected global growth affects emerging market growth prospects. Importantly, with oil prices significantly lower from their recent highs, the erosion of growth can now be seen as more moderate, given that many emerging market countries are net importers. With fiscal and current balances largely stable and in control, we see that many emerging market countries have adequate resources to fend off macro externalities, while also stimulating spending in their own countries.

Overall, we see the outlook for the various emerging market economies in which the mandate engages with a more constructive lens.

From a bottom-up perspective, the picture looks more appropriate. As active managers, we do not rely on what the EM standard describes. Therefore, we are actively investing in emerging market companies whose fundamentals have been really good during these volatile times. We’ve seen quarterly earnings reports that have been largely above expectations and that speak volumes about their fundamental outlook strongly over the medium and long term.

The long-term precedent of emerging market outperformance over developed market and many important episodes implying macro, market and micro improvements.

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top picks:

Patricia Perez-Cotes’ top picks

Patricia Perez Coates, portfolio manager at PenderFund Capital Management, her top picks: Sociedad Quimica y Minera de Chile, Taiwan Semiconductor and NetEase.

Sociedad Quimica y Minera de Chile (SQM NYSE)

Average Paid Share Price: $86.33

We love that SQM is the least expensive producer of lithium and specialty fertilizers. Its products are also mined in an environmentally friendly manner vis-à-vis other producers. Most importantly, the outlook for demand and prices for its many products remain positive, given the automakers’ aggressive capex plans. The company is an efficient operator and has carefully planned its upcoming capacity expansions. Operating margins are sustainable at 47 percent.

Taiwan Semiconductor (TSM NYSE)

Average Paid Share Price: NT$494.67

We love the moat that TSMC has with its critical and proprietary knowledge in designing 3 to 5 nm semiconductor wafers. The demand for chips is expected to continue to grow exponentially due to the greater diversity of uses and industries such as automobiles, cloud computing, electric vehicles, Internet of Things, artificial intelligence, 5G and acceleration of digital transformation. Sustainable return on equity of 22%.

Netease (NTES NASD)

Average paid share price: 145.39 HK dollars

We love the strong track record in developing PC and mobile games across genres, its ability to deliver a long lifecycle to existing PC and mobile game titles and its ability to maintain a balance of existing game monetization and spending on new games to maintain a stable margin profile. Continued growth both in China and internationally. Netease has the potential to become a major content provider for the metaverse.

SQM NYSE n n s
TSM NYSE n n s

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