Playing emerging-markets megatrends

How certain banks could benefit from rising incomes and an expanding middle class in EM countries.

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Many of the world’s emerging markets benefit from country demographics, such as rising personal incomes and the number of people joining the middle class—and, by industry, Fidelity’s Bill Bower thinks bank stocks are an effective way to play these mega-trends.

“Just as important, an improved economic outlook in 2021 and, with it, lower loan-loss provisions, have started to provide a reprieve from conditions that had kept bank stock prices low,” says Bower, portfolio manager of Fidelity® Diversified International Fund (FDIVX).

As Bower explains, the fund mainly invests in companies operating in foreign developed markets with competitive advantages and either durable or improving growth prospects. He also invests in emerging markets where and when he sees unique opportunities.

As of June 30, the fund owned shares of Kotak Mahindra, the fourth-largest private-sector bank in India, which he notes owns a capital markets business and life insurance subsidiaries as well. Bower likes this founder-led company’s strong management team, conservative asset mix, healthy liquidity, and strong growth potential—all of which he thinks could be aided by more cross-selling and digital marketing.

Similarly, the fund held India’s HDFC Bank (HBD), which he thinks could see improved business as India works to battle against a second wave of COVID-19. He notes the company’s quarterly results this spring showed healthy growth in both deposits and loans.

The fund also owned Indonesian banks Bank Central Asia (PBCRF) and Bank Rakyat Indonesia (BKRKF), each of which Bower thinks could see improved growth in net interest income if the economy fully recovers from COVID-19 and loan growth picks up.

“These are examples of companies I think have the potential to consistently boost earnings and free cash flow, align with my investment process and philosophy, offer exposure to growth trends, and present good value,” he says.

Fidelity® Diversified International Fund held securities mentioned in this article as of its most recent holdings disclosure. For specific fund information, including holdings, please click on the fund trading symbol above.

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