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Emerging Markets
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?
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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.”
Emerging markets: take care when choosing Asian tech stocks right now
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Emerging markets: take care when choosing Asian tech stocks right now
July was a strong month for emerging market equities, with the MSCI EM index returning 6.2%.
Not surprisingly, the strongest gains were in the tech sector — especially stocks with exposure to electric vehicles or artificial intelligence.
While these upward moves could continue, Pendal’s EM team sees “multiple signs that there may be excessive optimism in some of these stocks”.
For example, in Korea, EV and battery stocks represented nearly half of stock market turnover on some days in July, driven by retail investor leverage rising to a record 10 trillion South Korean won.
Chinese EV maker XPeng rose 74% in July, despite expectations it will lose $1.2 billion on $4.5 billion in sales. Meanwhile, some high-quality, large-caps with proven track records and technologies were laggards.
“Some parts of the EM equity space look particularly inefficient right now,” says the team.
Emerging markets: Stimulus unlikely but China opportunities remain
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Emerging markets: Stimulus unlikely but China opportunities remain
China is struggling with a slowing economy – leaving markets searching for signs of stimulus from Beijing.
Despite some recent market excitement, a quick stimulus package is unlikely, says Paul Wimborne, co-manager of Pendal Global Emerging Markets Opportunities fund.
“We think the key priority for the Chinese government remains building long-term economic and financial system resilience and growth hasn’t yet fallen to the levels that would lead them to aggressively stimulate.
“We think they will continue to push through mini stimulus measures in certain areas where they would like to encourage growth — but we don’t think they’re at a point where we’ll get a big stimulus plan.”
Still, there are opportunities to be found for investors.
“There are parts of the economy we are happy to get exposure to — and parts that we would like to avoid,” says Paul.
Emerging Markets: What’s driving Indonesia’s resurgence
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Emerging Markets: What’s driving Indonesia’s resurgence
Indonesia’s economic outlook has been attracting the attention of investors recently.
Why so?
Pendal’s Paul Wimborne says an improved trade balance on strong exports of commodities like palm oil, coal and nickel is paving the way for a resurgence in domestic demand.
“Indonesia is at that sweet spot in the cycle where the export side of its economy is doing well, the currency has the potential to go stronger, and domestic demand – which has been subdued for 10 years – looks like it could pick up.”
South-east Asia’s biggest economy is also benefiting from a government push to encourage more manufacturing and reform labour markets, says Paul, who co-manages Pendal Global Emerging Markets Opportunities fund.
Paul’s preferred exposure to Indonesia is via companies that benefit from rising domestic demand, such as banks, retailers and auto dealers.
Emerging Markets: Commodity cycle could be well timed for Brazil investors
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Emerging Markets: Commodity cycle could be well timed for Brazil investors
Brazil’s powerful agriculture, energy and mining sectors have been among the world’s big economic winners from the supply squeeze in 2022.
But with an election due in October markets are starting to get nervous about a change of government.
Left-wing Luiz Inácio Lula da Silva is leading in the polls. When he was last elected in 2002, markets sold off sharply, fearing a big-spending, left-wing agenda.
“But he moved centre-left when actually took office,” says Paul, who co-manages Pendal Global Emerging Markets Opportunities fund.
That was largely because his presidency coincided with a commodity super-cycle that boosted export conditions for Brazil and allowed increased spending.
Ironically, a similar story may play out again in 2022. High prices for energy, agricultural commodities and iron ore are boosting Brazil’s export earnings and lifting tax revenue.
“It’s too early to say, but it may well be that if Lula is elected he could once again be very fortunate in the timing of the commodity cycle.”
Emerging Markets: Three stocks set to benefit as supply returns
Economists often see inflation as a demand problem that can be solved with higher interest rates and tighter fiscal policy.
But there’s another side to solving higher prices — lifting supply.
As the world rebuilds supply capacity, investors have an opportunity to invest in companies that will benefit, says Pendal Emerging Markets manager Paul Wimborne.
“Whether that’s funded by governments or private companies, we’re finding opportunities at the moment in some portfolio holdings that are exposed to this trend and are experiencing very strong business conditions as a result of new investment in capacity.
“There’s been lot of investment into technology, the internet and building out the digital infrastructure. But not a lot has gone into what we would call the old economy — energy and industry.
“We think that might be more of a focus over the next decade.”
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