Why our emerging markets team believes the asset class could be entering a bull market

The Trump administration is having a major impact on the emerging markets asset class. Here, Pendal’s Global Emerging Markets Opportunities team outline the latest trends

• Mexico outperformed after US election
• We remain cautious on and underweight India
• Find out about Pendal Global Emerging Markets Opportunities fund

IT’S been four months since the election of Donald Trump confirmed a dramatic shift in US economics and foreign policy – bringing major implications for emerging markets.

The benchmark MSCI Emerging markets Index fell 1.6% in the four months between election day and March 5, underperforming global equities.

The MSCI All Country World Index (which measures both developed and emerging markets) returned 2.7% over that time and the MSCI USA gained 1.5%. (These are total returns in US dollars).

However, the headline numbers mask several major trends.

Emerging markets investors need to look deeper into the data to see which markets and sectors are winning and losing, along with more recent year-to-date trends.

High performers

The two emerging markets most exposed to the new policy environment in Washington (particularly regarding trade tariffs) outperformed in the four months after Trump’s election.

MSCI Mexico returned 3.1% and MSCI China gained 9.5%.

MSCI Brazil was down 8.5% with increased concerns about interest rate hikes. But many other traditionally higher-risk markets – including Turkey and smaller Latin American markets – were up.

The Pendal Global Emerging Markets Opportunities portfolio has been overweight Mexico, China and Brazil in the period.

Although the portfolio does not have direct exposure to the smaller Latin American markets, there is substantial economic exposure held through Brazilian consumer names.

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Pendal Global Emerging Markets Opportunities Fund

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India and high-tech EMs struggle

Many markets that struggled last year have been doing well. But what about the losers?

Notably, MSCI India fell 12.2% over the four months, despite limited trade exposure to the US and a good political relationship with the new administration.

A sense that the recent economic boom in India is losing steam and high valuations may not be sustainable is leading to increased caution among Indian investors.

We remain cautious on India and heavily underweight.

Similarly, the technology growth stories that dominated headlines last year are weakening.

MSCI Taiwan was down 4.2% and MSCI Korea lost 7% (Korea had a major domestic political crisis in the period).

After a long period of outperformance, the MSCI Information Technology index underperformed, dropping 3%.

MSCI Malaysia (-4.8%) and MSCI Thailand (-18.3%) were also exposed to technology exports and underperformed.

We continue to be underweight Taiwan and Korea (and Information technology) and zero-weight Malaysia and Thailand.

Trends point to strong EM market

Looking beyond the headline numbers, the deeper trends suggest an exciting story for emerging markets.

Every Latin American market had a positive return in US dollars in the four months after Trump’s election.

MSCI Mexico gained 8.7%, MSCI Brazil was up 7.6%, while MSCI South Africa (an overweight in our portfolio) returned 9.6%.

MSCI China returned 16.4% and MSCI EM as a whole was up 4%.

Improved growth prospects in China and the historically riskier parts of the asset class attracted investor interest as uncertainty grew about where the pain of tariffs would ultimately be felt.

These positive returns stand in contrast to a negative year-to-date return from MSCI US; MSCI US Growth retreated 3.9%.

These trends are new and, so far, short term.

There is a traditional English saying, “one swallow doesn’t make a summer” – and the global economic and political environment remains volatile.

But if we were asked what an EM bull market looks like, we would say that it looks like this.

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
 
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