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Emerging Markets
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
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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
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.
Emerging Markets: Why some investors may benefit more than others as the tide turns
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Emerging Markets: Why some investors may benefit more than others as the tide turns
HIGHER US rates and a US dollar have recently curbed Emerging Markets returns, since they tend to depreciate other currencies, weaken US demand and draw capital out of EM economies.
As inflation comes under control, it’s expected that rate rises will decelerate and the US dollar will eventually weaken.
That’s good news for EM investors.
But there is another change that may benefit some emerging markets investors more than others: country-level factors are again becoming a powerful indicator of potential returns.
Investment managers that focus on top-down, country-level analysis should be able to take greater advantage of the changing conditions.
Signs of improvement for two big factors that drive Emerging Markets
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Signs of improvement for two big factors that drive Emerging Markets
A turning point for emerging markets equities is approaching as the drivers of recent weakness rapidly dissipate, believes Pendal’s James Syme.
The end of the US rate cycle is starting to come into view and a newly engaged China is beginning the process of restoring growth, says James, who co-manages Pendal Global Emerging markets Opportunities fund.
That leaves it increasingly likely that stronger returns from EM stocks are imminent, he says.
“The two big drivers of the difficult environment in emerging markets in the last 21 months all seem to be improving,” says James.
“Right now, you don’t want to be too underweight EM and you don’t want to be too underweight China.”
Beijing is changing policy on Covid and property. Is this bottom for China stocks?
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Beijing is changing policy on Covid and property. Is this bottom for China stocks?
China stocks surged after Beijing finally made market-friendly policy moves on Covid re-opening and property industry debt.
Is this bottom for Chinese equities?
Investors should broadly see this as a buying opportunity for the best-positioned Chinese companies, says Pendal emerging markets manager James Syme.
“We essentially believe China’s policy choices in the past two years broke its economy and equity market. We may now be seeing the beginning of changes that are needed to fix this.
“We have very significantly reduced our underweight position in China.”
Some sectors remain unattractive though, he cautions. Avoid state-owned banks, private-sector property developers and tech giants with poor corporate governance.
Why we’re seeing a change in leadership among Emerging Markets countries
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Why we’re seeing a change in leadership among Emerging Markets countries
Emerging markets: Is it time to buy Chinese stocks?
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Emerging markets: Is it time to buy Chinese stocks?
“It’s a question we’re getting asked by a lot of clients,” says Pendal Emerging Markets manager Paul Wimborne.
The MSCI China index has halved since its peak in February 2021. Falls of that magnitude in developed markets soon attract bargain hunters sowing the seeds of the next bull market. Does the same thesis hold for China?
“The answer to that question at the moment is no,” says Paul. “We think value in EM should be assessed very differently than the developed world.”
Companies such as Alibaba and China Mobile may look like they fit the value bill. But investors also need to be able to realise that value.
“In the developed world, you have three strong catalysts for the realisation of shareholder value: strong corporate governance, minority shareholder rights, and an entrenched culture of merger and acquisition activity.
“In the emerging world, we think these catalysts are often lacking.”
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