The Point

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

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

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.”

Emerging Markets: Why Indonesia is looking good right now

Indonesian stocks could outperform over the next 18 months on the back of high commodity prices, strong domestic demographics and supportive monetary policy, says Pendal’s James Syme.

Brazil, Mexico and the oil-rich Middle East have been this year’s EM standouts — and Indonesia is well-placed to join that list says James.

As a major coal exporter Indonesia is benefitting from a shortfall in production and higher prices. Indonesia is also a leading exporter of palm oil, which is in demand due to disruptions to the edible oil trade from the Russia-Ukraine war.

The south-east Asian nation is also a significant exporter of metal ores, principally nickel.

And the world’s fourth most populous country is also rapidly urbanising with a burgeoning middle class.

“It has been a difficult year for a lot of countries, but Indonesia seems to have the right natural resource endowment and policy mix to relatively prosper,” says James.

Emerging markets: Countries likely to weather the storm

Declines in emerging market stocks over 2022 offer the potential for strong gains once the US rate-rise cycle peaks, says Pendal’s James Syme.

“Over the long run, in US dollars, emerging markets equities return a significant premium to the developed markets,” says James, who co-manages Pendal’s Global Emerging Markets Opportunities fund.

This year’s decline, while significant, is smaller than past sell-offs in emerging markets, says James.

EM investors will be watching for a change in direction from the US Fed and a weaker dollar; improvement in China’s economy and an easing in the Russia-Ukraine war.

As things turn around, investors should stick with markets that have best weathered the downturn – Latin America, South Africa, Southeast Asia and India.

“There are parts of the asset class that are doing OK – and the things you want to own when we get to the turn are the ones that are already winning.”

Emerging Markets: Is it time to invest in China again?

Is it time to think about investing in China again?

The world’s second-biggest economy remains in the strictures of Covid-19, as much of the rest of the world emerges and battles with high inflation and interest rates.

But in recent weeks there have been signs that things might be turning economically, says James Syme, who co-manages Pendal Global Emerging Markets Opportunities fund.

“To the end of April there was a real sense of doom and gloom around the Chinese economy and assets.

“But what we saw in the May data was clear evidence that some parts of the Chinese economy are doing better.

“I think we need to see more evidence of a fully-fledged recovery. But we are starting to see some evidence of change.

“We are not at the point where you look at the data and say you need to be overweight China, with a highly cyclical portfolio.

“But the things you want to see are starting to emerge, and that’s a shift.”