The Point

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.”

What the Russia-Ukraine crisis means for Emerging Markets investors

The Russian economy has been performing strongly, but the outlook is now uncertain as global sanctions bite.

We asked Pendal’s James Syme about the implications for EM investors.

“The geo-political risk is intense – possibly the highest of any EM in the modern history of the asset class,” says James.

“Recently the Russian economy has been benefiting significantly from current demand levels and prices for major commodities. The equity market is incredibly cheap on all measures.

“We recognise the intense political risk at the current time and the chance that sanctions mean we will not be given the time to see valuations move to reflect economic fundamentals.

“But we believe that, as index-relative investors, it is risky to not have careful, scaled, diversified exposure to Russia, given valuations and fundamentals.

“An improvement in the political environment could lead to a very significant move in Russian assets, as we have seen in previous recoveries.

Global equities: How to invest in a slowing China

Want to understand the outlook for China?

Look to Japan’s 1990s stagnation experience, says Samir Mehta, who manages Pendal Asian Share Fund.

As the rest of the world wrestles with supply constraints, runaway inflation and rising rates, China instead faces lacklustre growth, rising unemployment and the prospect of deflation.

“What we are seeing at the moment in China is reminiscent of what happened in the Japanese economy when their bubble burst in the 1990s,” says Samir.

“For the next three decades Japan’s economy was mostly hobbled. The companies that stood out had high pricing power, an industry structure with few irrational competitors and very strong cash flows.

“In my portfolio in China, I am gravitating towards these kinds of businesses – export-oriented champions or domestic champions with pricing power and cash flow.”

What does Xi Jinping’s consolidation of power mean for investors?

Confirmation of Xi Jinping’s third term as China’s leader wasn’t surprising, but his apparent control is greater than most expected.

It appears Xi’s main aim is to turn the “successfully achieved moderately prosperous society” into a “modern socialist society”.

“This is seen as part of China’s ambitions to be an independent technology powerhouse and to project power and influence,” says Pendal’s Brenton Saunders.

“This may suggest the economy remains on a relatively austere pathway by historical standards. 

“The potential for China’s property market remains muted. Material stimulus is unlikely beyond the short term.”

That’s a headwind for economic growth and demand for steel-making materials, Brenton says. “Iron ore and coking coal stocks are most exposed to the trend long term.

“But China’s strategic pivot to technology, grid investment and electric vehicles should benefit base metal and lithium-producing companies in the long term.”