Emerging markets: Which countries are best-suited to these market conditions

US tariffs will affect different emerging markets in different ways and investors must understand where each country sits on a spectrum of geo-economic risk. Pendal’s emerging markets team explains

• Current events suit one group of EM countries better than others
• Find out about Pendal Global Emerging Markets Opportunities fund

IN this highly dynamic environment it’s important to maintain a longer-term view on the performance of emerging markets rather than react to short-term market moves.

It’s also important for investors to understand how the Trump administration’s tariff policies will affect different emerging markets in different ways. 

Emerging market countries can be thought of as sitting on a spectrum — ranging from higher-risk, USD-sensitive, current-account-deficit, carry-trade markets to lower-risk, global-demand-sensitive, current-account-surplus, mercantilist markets.

The first category includes emerging markets such as Brazil, Mexico, smaller Latin American markets, Indonesia and South Africa.

The second category encompasses South Korea, Taiwan, Thailand, Malaysia and (to some degree) China.

European markets (Czech, Hungary, Poland, Greece) and Arabian Gulf markets (Saudi, UAE, Qatar, Kuwait) sit towards the middle of the spectrum, but also have their own drivers.

India also sits towards the middle.

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We believe current events significantly favour the first group over the second.

“US dollar weakness, particularly when tariffs might have been expected to strengthen the dollar, suggests a weakening of investor belief in US exceptionalism, leading to increased capital flows to the rest of the world,” the team says.

“The outperformance of non-US equities over US equities adds to this narrative.

“This is extremely beneficial to those USD-sensitive markets, particularly when put alongside the generally cheap equities and currencies in many of those countries.”

Where to use caution 

The second group, meanwhile, have focused on an export-led, mercantilist development model that is extremely challenged at present.

“There is no obvious demand source that can replace exports to the US for these countries, and many companies in them are likely to face significant earnings downgrades,” the team continues.

“It’s also worth noting that the weakening of US defence commitments to countries previously thought of as allies poses some of the starkest geopolitical challenges to Korea and Taiwan.”

This broad analytical framework does not remove the need to focus on country-specific risks and opportunities, the Pendal team cautions.

“In particular, we note China has a relatively low export/GDP ratio, and has high capability and economic headroom to provide offsetting stimulus.

“Where we are looking at new ideas, they are focused on the huge opportunity a weaker US dollar gives to some emerging markets and the potential for very strong returns from stocks in these markets if capital continues to flow from the US to the rest of the world.”

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

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