“We are focusing on earnings strength, and particularly, potential earnings surprises,” he told FSA.
Thanks to the combination of a stablising US dollar and better economic fundamentals in most emerging countires, he forecasts EM earnings growth to hit mid- to high-single digit growth this year with a possible further improvement to 10-12% next year.
Selective commodity companies can have earnings upside, “simply because the market still refuses to believe the current commodity prices are going to sustain for a longer period of time”.
Positions are more in downstream companies, such as refiners in India and Korea.
“When oil prices collapsed, and supply significantly outweighed the demand, oil exporters started to offer discounts, especially for Asian refiners, such as those in Korea. Profitability of those Korean companies have greatly improved in a year or so, up to the first quarter of this year,” he explained.
Another sector to look at is financials, he noted.
Countries where Dobrinov sees substantial lending growth for the past few years include Thailand, Indonesia, India and Brazil. This has led to higher reserves for banks due to capital requirements.
In the past few quarters the situation started to correct, he said. The pace of bad loan growth slowed, and so did the accumulation of reserves, or provisions, by banks, which helped earnings accumulation.
“The bottom-line earnings are very sensitive to the provisions, thus it helped the earnings as well as the return-on-equity.”
Nevertheless, many banks in the regions have relatively cheap valuations, he added.
Banks and financials among the top ten holdings in the firm’s Principal GIF Asian Equity Fund are India’s HDFC Bank, Korea’s Shinhan Financial Group, China Construction Bank and Bank of China.
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In addition to the Asian equity fund, Dobrinov manages the Principal GIF Emerging Markets Equity Fund.
Both funds versus their benchmarks over the trailing three years, according to FE data:
