The winds of change are blowing in emerging markets

Despite recent crosscurrents, emerging-markets stocks offer compelling prospects for those willing to navigate their complexity, according to Fidelity's Greg Lee, particularly in Brazil and China.

• Emerging-markets equities could benefit from corporate earnings momentum, monetary policy stimulus in China that surpasses expectations — potentially in response to higher tariffs imposed by the U.S. — and global economic acceleration driven by central bank easing, according to Fidelity Portfolio Manager Greg Lee.
• "Even in the absence of these drivers, my research reveals an abundance of country-, industry- and security-specific opportunities in this diverse segment of the equity market," says Lee, who manages Fidelity Advisor^® Emerging Markets Discovery Fund.
• In helming the international equity strategy, Lee focuses on smaller-capitalization companies exposed to the secular-growth trends of ascendant emerging economies, and favors quality businesses that are undervalued.
• Based on this approach, Lee says he is especially positive on Brazil, the fund's top country overweight as of April 30.
• "One key factor influencing Brazil's market is its currency," Lee explains. "Although the nation's central bank has cut interest rates, inflation has risen, weighing on the real, yet I believe that future interest-rate cuts by the U.S. Federal Reserve could help alleviate this pressure, potentially unlocking significant value in Brazilian equities."
• One fund holding that exemplifies his optimism is Lojas Renner, the country's largest apparel retailer, which he likes for its strong track record of returning capital to shareholders.
• "China is another focal point for me, but it presents a complex picture," Lee says. "Although the escalating trade war with the U.S. threatens demand for many Chinese exporters, I believe the government may support the overall economy by stimulating domestic consumption."
• While still finding value in the market, Lee is being a bit more selective in where he looks for opportunities, especially among those companies that are more oriented toward domestic demand. Volatile markets can create more potential for assets to be mispriced, and he continues to look for opportunities to buy strong, well-positioned businesses at attractive prices.
• Among the portfolio's top holdings at the end of April were marine shipping services company SITC International Holdings and Sinopec Engineering, which is engaged in oil refining and chemicals.
• Looking longer term, Lee believes the investment opportunity in emerging markets remains attractive: "By definition, these are high-growth economies brimming with many interesting and undiscovered investment opportunities, particularly among small- and mid-cap stocks. Furthermore, I believe our research team is uniquely suited to help me capitalize on them."