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Emerging Markets
Emerging markets: Where to hunt for opportunities in China
Parts of China’s equity market are showing opportunities at current price levels, says emerging markets portfolio manager James Syme.
James believes the EM equities asset class is dominated by bottom-up investors who, in the aggregate, alternatively underreact and then overreact to top-down developments.
“Sometimes over-reaction can occur to the downside, when groups of stocks within markets sell-off indiscriminately to unjustified levels on top-down concerns.
“We believe that’s happening in parts of the Chinese equity market – and that real opportunities are being presented at these price levels.”
Does that mean Chinese equities are set to outperform the broader emerging market benchmark?
No, he says. “The property sector continues to struggle and the loss of market share in US imports will not easily be regained.”
But there are opportunities, James believes.
Emerging markets: where else to look in Asia while China remains weak
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Emerging markets: where else to look in Asia while China remains weak
Subdued US imports are weighing heavily on Asian economies such as China.
Emerging markets investors should look instead to countries driven by strong domestic demand, argues Pendal portfolio manager James Syme.
James points to the World Bank’s latest economic outlook for east Asia, which highlights weakness in China’s economy and an ongoing slowdown in Asian exports.
The bank forecasts GDP growth decelerating to 4.5 per cent in the region – historically weak growth excluding short-term shocks.
“We do see continued weak growth in China,” says James, pointing to tighter monetary and fiscal policy, intervention in the private sector, the effects of the pandemic and a sagging share of US imports.
Instead, James points to Asian economies such as Indonesia and India, which are driven more by robust domestic demand than exports
“Indonesia and India are our only overweight country positions in east and south Asia,” says James.
Emerging Markets: Why Dubai and Abu Dhabi should be more than just a stopover
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Emerging Markets: Why Dubai and Abu Dhabi should be more than just a stopover
You’ve probably flown through Dubai – but have you thought about investing there?
“It’s one of our overweights that’s been doing well and which we think is perhaps flying below the radar,” says James Syme, a senior portfolio manager with our Emerging Markets team.
Since Covid, the UAE has staged a powerful comeback, says James.
“We’ve seen a big recovery in overnight visitor numbers. We’ve also seen a full recovery in oil production which took a big hit during Covid.
“But perhaps more importantly, we’ve seen a number of structural changes that are helping support the recovery.”
Among the reforms is the creation of a new visa category for non-nationals that allows residency for up to 10 years.
“That’s really helped support the movement of foreign nationals into the country.”
Emerging markets: Brazil is set up for a classic virtuous cycle
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Emerging markets: Brazil is set up for a classic virtuous cycle
Brazil’s bigger-than-expected rate cuts are raising the chances of sustained economic outperformance.
And markets are underplaying the likelihood of further rate cuts in Brazil, argues James Syme, who manages Pendal Global Emerging Markets Opportunities Fund
South America’s biggest country is showing signs of entering a classic emerging markets virtuous cycle of capital inflows, strengthening growth and rising markets, says James.
Brazil’s central bank cut its key interest rate 50 points to 13.25 per cent in August, ending eight months of keeping borrowing costs on hold.
Market expectations are for further cuts to 12 per cent by the end of the year and 9.25 per cent by the end of next year. But Syme says those expectations are likely short of the mark.
“Emerging markets tend to overshoot to the downside and then to upside. We think Brazil is setting up to be in a cycle of much more positive news, and that should be reflected in equity prices.”
Another Chinese property developer is in trouble. Here’s what it means
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Another Chinese property developer is in trouble. Here’s what it means
China’s property sector woes continued this week as another big property developer found itself in trouble.
Country Garden – China’s biggest property developer based on last year’s contracted sales – missed US$22.5 million in payments on two bonds.
The company is described as facing “periodic liquidity stress“.
Country Garden will probably find enough money to pay the coupon within the 30-day grace period, says our head of income strategies Amy Xie Patrick.
But it needs another $US2 billion for other payments, plus cash to complete pre-sold projects.
As the confidence crisis in the property sector deepens in China, levered property developers need strong new pre-sales to complete older pre-sales.
But monthly sales are well down on 2021 down and still falling.
“This is what is causing the ‘periodic liquidity stress’ – though I would describe it as existential rather than periodic,” says Amy.
Here Amy explains the detail and what it means for the global outlook
Emerging markets: Look past commodity exports to countries with strong domestic demand
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Emerging markets: Look past commodity exports to countries with strong domestic demand
Emerging markets investors often focus on commodity-intensive countries – many of which rely on China as one of the world’s top importers.
That may not be an attractive angle right now due to China’s weaker economy.
But it doesn’t mean there isn’t opportunity in the EM space, says Pendal PM James Syme.
Look past commodity export data to identify strong domestic demand stories, says James.
He points to Latin America, where GDP growth and equity market returns are traditionally correlated with commodity prices – especially metals.
“We’re very positive on the outlook for the domestic economies of Brazil and Mexico,” says James. “But not because we’ve got a particularly positive view on metals.”
Both countries should see significant interest rate cuts this year and next, further stimulating what is already quite robust domestic demand.
Capital inflows and caipirinhas: Brazil’s sunny outlook
Brazil’s central bank, Banco Central do Brasil, was one of the first global monetary authorities to start lifting interest rates.
It was tough medicine but now the top-ten economy is reaping rewards earlier than its peers, says James Syme, who co-manages Pendal Global Emerging Markets Opportunities fund.
“In emerging markets, typically everything goes wrong, or everything goes right.
“If things go right, you typically get capital inflows, a stronger currency, a better inflation outlook, the prospect for yields to fall, equities going up along with economic growth – and an easing of any political stresses.
“We think that’s where Brazil is now.
“We are also seeing broadly similar patterns in India, Indonesia and Mexico.
“Long, deep down-swings tend to be followed by long upswings – and that’s broadly what we expect will happen with these economies.”
Emerging markets aren’t so different to us – but you’ve got to pick the right ones
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Emerging markets aren’t so different to us – but you’ve got to pick the right ones
There’s a common misconception that emerging markets countries are dysfunctional, war-torn or burdened with significant health or security issues.
“But they’re not that different from us,” says James Syme, who co-manages Pendal Emerging Markets Opportunities fund.
“The main emerging market benchmark has 24 countries in Latin America, eastern and southern Europe, Africa and Asia.
“Generally they are well-run democracies or stable non-democracies with happy, successful economies and large and growing middle classes.”
That misperception presents an opportunity, says James – as long as investors can choose the right countries.
James and his team are now investing in eight EM countries including Brazil, Mexico and Indonesia.
EMs can help diversify risk in global equities portfolios, says James.
Emerging Markets: Take care with Asian tech leaders such as Korea and Taiwan
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Emerging Markets: Take care with Asian tech leaders such as Korea and Taiwan
Emerging markets investors will be aware that media and analysts have recently been talking up the prospects of a return to growth for key Asian tech hardware export markets.
But Pendal’s James Syme warns investors to take care before jumping into Korea and Taiwan on the back of bullish semi-conductor export expectations.
Both countries continue to face historically weak conditions in their key computer chip and electronics export industries, says James, who co-manages Pendal Emerging Markets Opportunities fund.
“We’ve seen a lot of investors go back to the playbook of what worked for the last couple of years – Chinese Internet stocks and Korean and Taiwanese tech hardware names.
“But when we look at the data, we see no evidence of that at all.”
Instead, James believes investors should stick to the EMs best suited to current global economic conditions, such as Mexico, Poland, Hungary and Czech Republic.
Emerging Markets: December quarter shows positive signs after a challenging 2022
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Emerging Markets: December quarter shows positive signs after a challenging 2022
IT was a difficult year for emerging equity markets in 2022, but the December quarter was more positive despite ongoing growth and inflation pressures in key economies.
Last year Russia’s invasion of Ukraine drove prices of key commodities sharply higher in an environment where inflation was already high and the outlook for interest rates was difficult.
This was combined with ongoing economic weakness in China.
The MSCI EM Index returned -20.1% in USD terms.
Here is a recap of the main EM themes in 2022 and what we learned in the closing months of the year.
How a weaker US dollar could benefit Emerging Markets investors in 2023
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How a weaker US dollar could benefit Emerging Markets investors in 2023
The direction of the US dollar — and the capital flows that result from that — are a key (possibly the key) driver for the emerging markest equities asset class.
The US dollar has been significantly weaker in recent months, suggesting a peak was reached in October 2022.
To be clear, there have been previous short-term peaks and troughs in the dollar during broad upswings and downswings. (For example in March 2020 during the initial onset of COVID-19, after which the dollar weakened but remained in its uptrend).
But if the dollar has topped out (at a level similar to the top in 2002) — and 2023 and beyond are to be weak-dollar years — investors should bear in mind the highly positive implications for EM equity and for the more capital-sensitive markets within that asset class.
This article explains the relationship between the US dollar and the EM asset class — and what it means for investors in the year ahead.
Why advanced economies such as South Korea are classed as emerging markets
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Why advanced economies such as South Korea are classed as emerging markets
SOUTH Korea is one of the few countries in the world to develop its own supersonic jet fighter.
It’s a stable and mature democracy — and home to some world-leading technology companies.
So some investors might be surprised to find it’s classed as an emerging market, along with Taiwan and wealthy Gulf countries such as Saudi Arabia and the United Arab Emirates.
What is an emerging market? Who decides the definition of emerging equity markets?
It’s an enduring controversy. Some countries at the more advanced end of the emerging markets (EM) spectrum could arguably be classified as developed markets.
It’s useful for investors to understand how countries are classified as emerging markets as opposed to frontier (or pre-emerging markets) and developed markets.
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