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Emerging Markets
Emerging markets: Why China is unlikely to face a Japanese-style ‘lost decade’ despite its cloudy outlook
There is a temptation to see China falling into the same kind of balance-sheet recession that Japan experienced after its late 1980s boom, says Pendal’s emerging markets team.
Japan’s Nikkei index has only just this year regained its 1989 peak after a series of so-called “lost decades”.
Given the historical pattern of a decade-long, debt-driven real-estate boom followed by what looks like a debt-deflationary slowdown, do Chinese equities also face a similar “lost decade”?
From beer to luxury products to cosmetics to cars, a clear pattern has emerged among western multinational companies warning about weak Chinese demand.
But a closer look at company results shows a different, more promising pattern, argues Pendal’s team in a new article.
Many Chinese domestic companies are reporting good results and earnings growth. Consensus estimates of future earnings are also being revised up.
There are opportunities to be found in Chinese equities, the team argues. “We remain overweight Chinese equities in the portfolio, with exposure to a highly selective set of stocks.”
Read more here
Global market volatility should be positive for stocks in some emerging markets
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Global market volatility should be positive for stocks in some emerging markets
In the EM space, market segments with the highest exposure to international investors saw the greatest weakness during the recent bout of market volatility.
Pendal’s Global Emerging Markets Opportunities team spotted opportunities amid the volatility – but not necessarily in the obvious places.
“In EM equities, the pain was concentrated in the IT sector, especially in Korea and Taiwan,” the team said in a recent report.
“We find hard to be overly positive about the IT sector, despite a reset in valuations.
“The entire sector has re-rated substantially in recent years, despite essentially soft demand in important end-demand segments such as PCs and mobile phones.
“This optimism has been attributed to a potential demand shift from widespread adoption of generative artificial intelligence.
“But beyond some key semiconductor names held in our portfolio, we have not seen sufficient evidence of this opportunity.”
Instead, look to companies in Mexico and Brazil, which appear to be well placed in the medium term, the team said.
Emerging markets: The drivers creating conditions for stronger returns
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Emerging markets: The drivers creating conditions for stronger returns
Emerging equity markets tend to be driven by two broad global drivers:
- Global end demand and trade
- US dollar interest rates and liquidity
Each EM country also has its own business and credit cycles to consider, along with local political environments. But these factors are always interacting with the two main global drivers, points out Pendal’s emerging markets team.
Right now, one of the challenges for EM investors is interpreting differing signals from these drivers.
In an article, Pendal’s UK-based Global Emerging Markets Opportunities fund managers say that global demand indicators – such as manufacturing data – look supportive for EMs such as India, Brazil and Indonesia.
Consumer confidence also looks robust in these three markets.
But the other half of the story is the US dollar’s continuing strength and caution about the future direction of US monetary policy.
In this article, the team explains why they remain confident that US dollar softness – when it comes – will create the conditions for strong returns in certain countries.
Emerging Markets: Mexico and Brazil could benefit from bigger-than-expected rate cuts
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Emerging Markets: Mexico and Brazil could benefit from bigger-than-expected rate cuts
Pendal’s emerging markets team expects significant interest rate cuts in Mexico and Brazil, increasing their attractiveness to investors.
Although many developed and emerging markets have been cautious on lowering rates, Latin America has embarked on a broad rate-cutting cycle including Mexico last month.
“It’s true that some Latin American central banks that were quick to cut are now turning more cautious — notably Chile and Peru,” says James.
“But we believe Mexico and Brazil should both be able to deliver hundreds of basis points of cuts in policy interest rates over the next 24 months.”
Rates in both countries should come in much lower than consensus expectations in coming quarters, James says.
“This should bring an even more-positive boost to economies, corporate earnings and equity market returns.”
How the biggest election year in global history will affect emerging markets investors
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How the biggest election year in global history will affect emerging markets investors
The US election will take the spotlight in November, but emerging markets investors will need to keep tabs on dozens of other national polls this year.
“2024 has the highest concentration of elections, possibly in modern history,” says Paul Wimborne, a senior find manager in Pendal’s emerging markets team.
“There has already been presidential elections in Taiwan and later this year there will be elections in India, Indonesia, South Africa and Mexico.”
Those countries represent 40 per cent of the MSCI Emerging Markets Index by weight and 1.9 billion people.
Investors will need to consider the ramifications of elections with the potential to affect the global macro environment that matters so much to emerging equity markets.
These include Russia in March and the US in November.
While Israel is not schedule for an election, the emergency government formed after the Hamas attacks may not last throughout 2024.
Not just cricket: Why our emerging markets experts like India
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Not just cricket: Why our emerging markets experts like India
India may have fallen short in the Cricket World Cup this month, but it’s been on a winning run since hosting its previous world cup in 2011.
Since then the country has changed massively, becoming a more attractive location for emerging markets investors, says Paul Wimborne, who co-manages EM investing at Pendal.
“The most significant changes have been in internet connectivity and digital infrastructure.”
The nation’s Digital India program, launched in 2015, has digitised government services and built national internet infrastructure.
The project is now a blueprint for developing nations, Wimborne says.
“India has always had a strong services export economy based on software and services. This is going to kick things along even further.
“We are going to see huge changes in things like healthcare and digital commerce. Small-to-medium enterprises will have much greater ability to sell online.
“India is going to become an even bigger powerhouse.”
Emerging markets: UAE’s journey from desert sands to investment oasis
The United Arab Emirates was hit badly by Covid, reporting more cases compared to its neighbouring Arabian gulf states.
That caused a drop in tourism, subdued real estate and higher unemployment.
But it’s since made a powerful recovery and undergone structural reforms that make it more attractive to emerging markets investors.
“The significance of the structural reforms has been underestimated,” argues James Syme, a senior PM from Pendal’s EM team.
Foreign nationals can now live and work in the UAE for a decade and buy property there.
Other reforms have developed Abu Dhabi and Dubai into financial centres. In 2022, the region hosted roughly a quarter of all global IPO volume.
“After taking a thorough look at the UAE’s recovering tourism, trade and oil sectors in the context of deep structural reforms, we moved our position to overweight,” says James.
Emerging markets: Where to hunt for opportunities in China
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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
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