Chinese market and economic data has shown improvement, but investors need to see more evidence of a fully-fledged recovery, says Pendal’s JAMES SYME

• Chinese data shows signs of improvement
• Consumer and property market remain weak
• Find out about Pendal Emerging Markets Opportunities Fund

IS IT time to think about investing in China again?

The world’s second-biggest economy remains in the strictures of Covid, while 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, co-manager of Pendal Global Emerging Markets Opportunities fund.

“China’s had a very difficult run in terms of economic data and market performance. That’s been driven by both Covid and tight lending policies, particularly towards residential mortgages.

“There’s no sense that the economy is in crisis, but it is unusual to have this deep a slow-down.

“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,” Syme says.

As is typical in turning points, there is no irrefutable evidence that the Chinese economy has bottomed, Syme says, but the next few months of macro-economic data will be worth watching. 

“The M2 money supply number we track was up 11 per cent in the month of May. New loans were reasonably strong. The annual rate of growth in the credit system has picked up to 9.1 per cent.

“We are not yet at a full-throttle, credit-driven recovery, but certainly there’s been a turn in those numbers,” Syme says.

“There’s been a turn in some of the economic numbers also. Industrial production has gone positive, having been negative. Fixed asset investment is picking up.

Watch consumer demand

“But — and it’s a big but — the overlapping combination of residential property and the consumer remains phenomenally weak,” he warns.

The improvement in the past six weeks in the Chinese economy is largely thanks to a surging trade balance (whereby imports have fallen and exports have remained strong) and government spending.

“China is still in Covid and one of the things we saw around the world was that governments ramped up fiscal spending to support economies during the pandemic. In the second half of 2022 we might see China do that.”

What it means for investors

What are the implications for financial markets?

“There’s been a more positive tone to Chinese equities in the past couple of months,” Syme says, highlighting that most major bourses and many asset classes from bonds to cryptos have been sold off in that period.

“China’s equity market is up. Not a lot, but it’s up. There’s more positive news around the tech sector and some property-related assets.”

Commodity prices, which affect the Chinese economy, remain an unknown.

“There’s been a lot of concern that commodity prices are generally very high at a time when the Chinese economy is weak and questions about whether they can be sustained,” Syme says.

“But another way of looking at it is commodity prices are where they are, even though the Chinese economy is weak. If demand-supply remains tight and you get a Chinese recovery, then prices could move even higher.”

Time to invest?

So, is it time to invest more heavily in China?

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

“Six weeks ago, if you looked at the Chinese economic data, you’d say there’s nothing to do here,” Syme says.

“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.”

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Latin America offers a rare bright spot in a world worried about inflation, interest rates and war, says Pendal emerging markets manager James Syme

• Latin America offers a bright spot for EM investors
• Strong growth underpinned by commodities
• Find out more about Pendal Global Emerging Markets Opportunities fund

THE mood in global markets may have left investors feeling uncertain, but there are opportunities in even the most negative of times, says Pendal emerging markets manager James Syme.

Right now, the sometimes overlooked markets of Latin America are a bright spot in a world worried about inflation, interest rates and war, says Syme.

“In the first four months of the year, when global emerging markets were down 12 per cent, Latin American stock markets rose 11 per cent.

“And it’s more than just a market move — the underlying fundamentals are looking pretty good.”

Under the radar

Latin America often flies under the radar of investors, partly because its commodity-exposed economies are subject to boom-and-bust cycles that can leave investors vulnerable to swift capital outflows.

But in the face of global uncertainty, big Latin American economies like Brazil and Mexico are doing well.

“We’ve seen GDP growth expectations revised upwards as economic data comes in relatively strongly,” says London-based Syme, who co-manages Pendal Global Emerging Markets Opportunities fund with Paul Wimborne.

“For some investors, that’s been a surprise. People have thought that a stronger US dollar and higher bond yields will start to really drag on Brazil.

“But it has its own internal cycle, which has been reasonably strong.”

Strength in Brazil

Syme says Brazil is seeing strength across the board in services, retail sales, consumer confidence and credit growth.

“It’s probably the strongest credit environment in any emerging market,” he says.

The underlying support for the strength is commodity exports.

Brazil is a significant oil producer and produces commodities like pulp and paper as well as metals.

“Brazil is also a huge food exporter. One element that’s been overlooked is that with Russia and Ukraine going offline in terms of edible oil exports — and Indonesia putting a palm oil export ban in place — that’s about 50 per cent of global edible oil exports taken offline.

“One of the big alternatives to palm oil is soy — and Brazil is a major soy exporter.”

“The whole commodity export side from Brazil is really robust. And that’s happening at the same time as the domestic cycle is picking up,” says Syme.

Brazil’s policy response to the booming economy has been significant interest rate hikes, leaving it well placed to weather increases in global bond yields and a higher US dollar.

Mexico overlooked

Syme also points to Mexico as an example of boom times in a sometimes overlooked market.

“Mexico is a very high quality, stable market. I’ve seen it characterised as boring, but sometimes boring is good,” says Syme. “In a difficult world, it’s got a relatively high return on equity and good corporate governance.”

Mexico is a large domestic crude oil producer, which reduces the economic risk of higher oil price.

And it’s a beneficiary of strength in the neighbouring US economy.

“These inflationary pressures we’re seeing in the US are a reflection of a strong economy — that’s just a huge benefit for Mexico.

Again, like Brazil, the central bank has been hiking rates.

“But they’ve remained highly orthodox through the inflation spike. There probably will be some more hikes ahead but again, we’ve probably seen bulk of what needs to be done,” he says.

Underpinning the Mexican stockmarket is a big domestic pension fund industry with assets equal to 25 per cent of GDP.

“They’ve been increasing their allocation to domestic equities.”

And remittances — largely from the US as Mexicans abroad send money home — are supporting the economy, up 13 per cent year on year in March.

Keep an eye on politics

There are risks, says Syme.

The traditional threat to Latin American markets is politics. Brazil is due for an election in October and a win by the left-wing candidate may be a challenge to some parts of the Brazilian equity market. But Mexico is already under a left-leaning government and performing well.

“We are comfortable in both cases,” says Syme.

“Emerging markets go right or wrong at a country level and a lot of what happens is around economic cycles and how they interact with global economic cycles.

“Booms in emerging markets can be quite sustained.

“And while valuation alone is not an investment case, most of MSCI LatAm looks pretty reasonably valued in a world where a lot of assets don’t.”

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Many EM countries look to be in good shape to weather the US Fed’s interest rate tightening cycle this time around. Pendal’s JAMES SYME explains why

HOW will higher US interest rates play out for emerging markets?

Historically, the answer is not well. As the US Federal Reserve lifts rates, the conventional wisdom is that emerging market economies need to keep pace to avoid capital outflows, putting a dampener on their economies.

But there are some nuances to keep in mind that might mean this time is different, says Pendal’s James Syme.

“There’s a lot of concern in market that when the Fed starts hiking, emerging markets are going have to put through a big chunk of interest rate hikes in order to keep up,” says Syme, who co-manages Pendal Global Emerging Markets Opportunities fund.

“But our view is that emerging markets have been hiking hard for some time now — and it actually looks like it is the Fed that is significantly behind the curve.”

EMs hike hard

Brazil’s central bank has raised policy interest rates nine times since the first post-pandemic hike in March 2021. Rates have been lifted by 9.75 percentage points to 11.75 per cent.

“The implication is that if the Fed has to do 400 basis points in hikes, that doesn’t mean Brazil is going to have to.”

The story is similar in other emerging markets.

The South African Reserve Bank has lifted rates three times by 25 basis points each since it started hiking in November. Mexico has lifted rates seven times from 4 per cent to 6.5 per cent since mid-last year.

Syme says the Mexican example illustrates the difference between the way the US and emerging markets are tackling inflation.

“Think about how tightly coupled Mexico and the US are. Mexican consumer price inflation is about 7.5 per cent, a percentage point slower than in the US. But Mexican policy rates are six percentage points higher than the US.

Quicker than the Fed

“If you look just at the inflation dynamics, yes you might need some more hikes out of some of these emerging markets central banks to get to the top of the cycle. But the central bank that looks like it’s going to have to go a lot quicker is the Fed.

“And that doesn’t automatically turn into a one-to-one relationship with hikes in the emerging world.”

The implication for emerging markets is they look to be in much better shape to weather the US Fed’s interest rate tightening cycle this time around, says Syme.

Still, there is a question for investors as to why the Fed is moving more slowly than its emerging markets.

“Maybe the Fed is right — maybe there’s much more deflation coming than we can see in trailing data,” says Syme.

“But if that’s the case, then we could be getting to the top of emerging markets interest rate cycles.

“If that’s true, maybe we can start cutting rates again.”

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

BEIJING’S public insistence on zero Covid tolerance has put a question mark over China’s economic outlook — and raised concerns its growth targets are too ambitious. JAMES SYME explains what it means for investors

• Covid lockdowns threaten outlook
• PMI data weakest since height of pandemic
• Wait for policy response: James Syme

CHINA’s economy grew at a better-than-expected 4.8% annual rate in the first quarter, despite pandemic lockdowns in major cities and the repercussions of a tightening of regulations on property developers.

But Pendal’s James Syme says a more telling figure may be the recent Purchasing Managers Index — a monthly survey of business activity — which showed activity falling to its lowest levels since the height of the pandemic.

“We can only focus on the data and the PMI is a powerful guide to how problematic things are in China,” says Syme, who co-manages Pendal Global Emerging Markets Opportunities Fund.

“The PMI was quite soft in the manufacturing sector and extremely weak in services.

“And remember these are national figures — if the national figure is at these levels than some parts of the country must be really weak.”

Syme says the problems for China’s outlook stem in a large part from the last year’s tightening of regulation in the real estate sector as Beijing enforced its ‘three red lines’ policy limiting developers leverage in proportion to their equity, assets and cash.

“China essentially delivered a huge negative shock to the economy,” says Syme.

“There’s lots of focus on other regulations in education and technology because those have more of the stock market impact, but those sectors are not particularly big in terms of the overall economy.

“It was the enforcement of the three red lines policy in real estate which had a really serious chilling effect on what is one of the was probably the largest sector in China.”

Syme says the effect was wider than property prices, impacting demand for building materials, construction equipment, white goods and furniture.

Now, Covid-related lockdowns and port closures in major cities are posing further threat to the economic outlook.

“This might be short term, as it was in February 2020,” says Syme. “And clearly with vaccinations, China is in a better place than it was before.

“But the outlook for the Chinese economy is really quite uncertain at this time.”

What should China investors look for?

Market nerves about the outlook mean some of China’s most high profile and fastest growing companies are trading at lower prices than they have for years.

“Our policy has always been that cheapness alone is not a driver — you need signs of positive economic or political direction,” says Syme.

Syme says the most important thing is to wait to see Beijing’s policy response to the slowdown.

To date, Beijing has not intervened with a loosening of monetary policy or fiscal stimulus and appears to be seeking to export the nation’s way back to growth.

“But that’s probably not going to be enough in itself,” says Syme.

“We’ve seen the Chinese trade balance just continue to grow and if you think of a country’s trade balance as what it produces minus what it consumes, a stronger trade balance is really just more evidence of economic weakness.

“At some point, there’s going to have to be some kind of stimulus — but then we go back to the problem that Chinese policymakers have that they want to constrain debt to GDP.

“But if you want to use stimulus you have to grow debt faster than GDP.”

And longer term?

“There’s only so long that China can grow much faster than the rest of the world,” says Syme.

“Those six and half percent growth rates simply couldn’t be maintained forever.”

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

The Russian economy has been performing strongly, but the outlook is now uncertain as global sanctions bite. Here is the EM view from Pendal’s JAMES SYME

• Read updated commentary from James on the broad impact of sanctions

THE investing environment for Russian assets is clearly extremely uncertain right now.

Geo-political risk is intense — possibly the highest of any Emerging Market in the modern history of the asset class.

However, 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.

The Russian economy has been performing strongly on the back of commodity exports and a domestic recovery from Covid.

Economic growth in 2021 accelerated to a 14-year high of 4.7%, beating consensus forecasts.

Exports, investment by oil and gas companies and government spending have been all major contributors. Growth was stronger into the end of the year, and the outlook for growth in 2022 is promising.

Our positioning in Russia was to move from heavily underweight to slightly overweight in January, following the declines in the equity market and the currency despite robust fundamental conditions.

From the October 2021 peak to the end of January, MSCI Russia index fell 24.6% in USD terms, even as the oil price rose through the USD 90/barrel level.

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.

However, 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.

In calendar year 2009, the USD total return for MSCI Russia was more than 100%. From late 2014 to late 2016 it was 63.7%. From October 2020 to October 2021 it was 83.2%.

We would highlight another facet of emerging market equity investing – there are no ‘safe’ investments.

In the past 12 months previous investor favourites Alibaba, Meituan and Sea Group (all Emerging Asian internet companies) are down more than 50 per cent in USD terms.

In the same period, the highly unpopular Brazilian energy company Petrobras (which has been one of the largest holdings in the portfolio) has returned 114% in USD terms.

We continue to adhere to our successful process, which is to combine economic, political and market risks and opportunities into a top-down view to identify preferred countries, and to apply a rigorous risk-focused portfolio construction process to allocate to those markets.

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Deep, country-level analysis is critical in emerging markets investing, says Pendal’s James Syme. India and Mexico are two examples of countries with hidden strengths

• Conventional wisdom says India, Mexico should slow
• Hidden depths to their economies leave them well placed to grow
• Find out about Pendal Global Emerging Markets Opportunities Fund

LOOKING beyond the headlines is critical in investing, especially when assessing emerging markets, says Pendal’s James Syme.

India and Mexico are two current examples of countries with unexpected, hidden strengths.

Rising inflation and higher commodity and energy prices are traditionally a negative for commodity importing countries like India and Mexico, says Syme, who co-manages Pendal Global Emerging Markets Opportunities Fund.

Yet he likes both countries due to domestic factors that leave them well placed to weather global economic changes.

“Mexico is a major oil producer, but a significant commodity importer that trades on the strength of its manufactured exports to the US.

“India has a long-standing vulnerability to commodity prices both through inflation and the current account balance.

“So why are we positive on these two markets?”

The reason is hidden in the domestic data.

For India, it’s the unsung strength of its computer service exports. For Mexico, it’s the record remittance income from citizens working abroad.

“It’s easy to overlook the strength of India’s computer services exports. There’s no single trade number that captures things like IT services, software product development, business process outsourcing, data services, engineering services and the like,” says Syme.

“But there’s a central bank survey. In 2013, Indian exports of these types of services were $62.6 billion but in 2021 they were $133.7 billion.

“Because the listed companies make up so much of that market you can almost get a feel for how they are doing by extrapolating from the 20 largest listed business.

“And this year, ending March 2022, should be a really good year.”

This matters because in 2013, India’s oil imports — the key economic vulnerability traditionally feared by investors — exceed its IT services exports by $100 billion.

But in 2021, the deficit was erased.

“A significant part of India’s oil import bill is now being paid by its IT services exports — and they continue to grow significantly.

“The India of today and the India of ten years ago are not the same country.”

A similar story in Mexico

Syme tells a similar story about Mexico.

As a commodity importer and manufactured goods exporter, Mexico should struggle in times of rising input prices.

But the overlooked factor is the huge and growing remittances being sent home by Mexicans abroad.

“Lots of countries have income from citizens who work abroad, but for Mexico, remittance income is really big. Family remittances were $52 billion in calendar 2021.”

These remittances almost entirely come from the US, where tight labour markets, especially for low paid workers, are proving “exceptionally positive for the Mexican economy”, says Syme.

“One of the main things Mexico exports is Mexicans. Being adjacent to the US is Mexico’s secret strength.

“Like IT services in India, it’s been a story of steady growth. In 2021, remittances in Mexico were up 25% on the calendar year before.

“It doesn’t show up in the trade balance — but we think you have to take it into account.”

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Rising oil and gas prices mean boom times for emerging market energy exporters such as Brazil, Mexico and Russia, says Pendal EM manager JAMES SYME

• Rising oil prices are lifting energy exporters
• Boom times for countries that sell energy
• Brazil, Mexico and Russia the picks

GLOBAL equity investors should look to Brazil, South Africa and Russia in 2022 as rising oil and gas prices deliver widespread economic growth to emerging market energy exporters, says Pendal’s James Syme.

Shifting attention to commodity exporters would be a change for many global investors who have been enamoured with China’s internet sector and the big semi-conductor stocks in recent years.

Syme — who co-manages Pendal Global Emerging Markets Opportunities Fund — agrees that has been the right approach for the past decade.

“But the Chinese economy is not particularly strong at the moment, and while it’s been a long time coming back for some of these other emerging markets, everything is starting to look good,” he says.

The oil price at around US$90 a barrel is at its highest levels since 2014 amid surging demand, while European near-term gas futures — which normally trade between EUR 10-20/MWh — recently spiked above EUR 180.

Syme says it’s not surprising that energy prices are rising as a long period of low investment in new capacity is followed by a sudden post-Covid resurgence in demand.

Western Europe has been reducing domestic gas production for environmental reasons, lifting its reliance on Russian gas. Germany has been steadily decommissioning nuclear power, including shutting three of its last six nuclear plants on December 31.

And recent weather patterns have also played a role. Over the past few years Europe has had unseasonably cold winters and warmer than usual summers — which both lift energy use — while relatively windless autumns have capped power production at wind plants.

At the same time, Russian domestic demand for gas is rising and Russia’s gas exports to other countries, including China, have been increasing.

‘Boom times’

“Rising energy prices and the resulting inflationary push are going to be an economic and political problem for energy consuming nations,” says Syme.

“But for the countries that sell energy, this is fantastic.

“It’s just boom times.”

Syme says the boom is not limited to energy, with many other agricultural and mining commodities also seeing price rises, which benefit Brazil and Russia, and other commodity exporters like South Africa.

“And we haven’t really seen the reaction in terms of what that might mean for domestic stocks or currencies that we would expect to see.

“That’s why we continue to have positive view towards some of these markets and think they’re overlooked.”

Higher commodity prices flow directly through to economic growth in exporting nations.

More export earnings mean companies can lift capital investment, hire more staff and pay higher wages, boosting consumption. Higher exports also improve a country’s current account balance and support its currency.

The resulting growth flows through to tax revenue, allowing governments to lift spending or cut taxes.

“It’s positive across the board,” says Syme.

Natural gas is also benefiting from its potential role as a bridge in the transition to lower carbon emissions.

“Both in terms of production and consumption, the carbon emissions per unit of energy for natural gas are lower than oil and much, much lower than coal.

“Notwithstanding the geopolitics, Europe could significantly reduce its carbon emissions if it switched power generation from coal to natural gas.”

So where to focus investment attention?

“We think this is a good time to own Latin America, where we prefer Brazil and Mexico” says Syme.

“We also think it’s a good time own South Africa and Russia.”

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

One of 2021’s takeaways is that Covid is cyclical, says Pendal’s JAMES SYME. That means investors should be on the look-out for opportunities among over-sold reopening stocks

• Sell-off in the reopening trade provides opportunities
• Strong balance sheets with attractive valuations will reward investors
• Find out about Pendal Global Emerging Markets Opportunities Fund

ONE of the big lessons of 2021 for investors is that Covid is cyclical.

“It has these short-term cycles,” says James Syme, who co-manages Pendal’s Global Emerging Markets Opportunities Fund.

“Things get bad and then they get good and then they get bad again. And when things are getting bad, it’s not the end of the world.

“The speed of that cycle is much faster than a business or interest rate cycle. It’s measured in less than a year. That’s one of the key take-aways of 2021.“

When investing in this type of environment, it’s important to stick to fundamentals, and not get too swayed by trends, he says.

“If you buy good businesses with strong balance sheets at attractive valuations, you’re doing the right thing. We’re investors. We aren’t trading stocks.”

Opportunities among over-sold re-openers

Global conditions may not be optimal for emerging markets right now, but there are opportunities to be found partly because the recent selloff in the re-opening trade has been overdone says Syme.

“A combination of tightening monetary policy by the US Federal Reserve, a stronger US dollar and a slowdown in China creates a difficult environment.

“If you think about what fuelled the boom in emerging markets from 2002 to 2008 it was relatively soft US monetary policy and a huge boom in China,” Syme says.

But there are opportunities, in part because Syme believes the selloff in the re-opening trade has been overdone.

“We always think about the opportunity in emerging markets, rather than the opportunity of emerging markets,” he says.

“Leisure, airlines, hotels and even bits of retail have been sold, and that’s accelerated in the last month by fears about the new Omicron variant of Covid-19.

“But I think some of the sell-off is too much. We are going to get back to normal at some point.”

Where the opportunities are

Syme has been considering reopening opportunities, and recently added a Korean entertainment business to the fund he manages, Pendal Global Emerging Markets Opportunities Fund.

In Brazil, the fund holds an airline and a brewer.

He still sees opportunities in emerging markets that are reliant on commodity prices.

“Commodity prices remain elevated, notwithstanding some have come off a bit,” he says.

That helps other parts of commodity producing economies, he says, nominating retail in South Africa, where mineral exports have been extremely strong.

There are also opportunities for the reopening trade in the Middle East.

“We own a real estate name in the UAE which is a beneficiary of higher oil prices. Because it’s in Dubai, it also benefits from the normalisation of travel and tourism,” he says.  

Syme acknowledges the risk that the short-term performance of some of these stocks may disappoint.

“But the next couple of quarters of cash flow may not reflect the overall value of the business.”

He emphasises the need to find opportunities within emerging markets and some bourses he remains underweight.

“In Russia we’re concerned about political risk and the Ukraine.”

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

A country-by-country approach to asset allocation is the best approach for Emerging Markets investors right now as inflation risks play out, says Pendal’s James Syme.

Watch a short video interview below with Pendal senior fund manager James Syme and portfolio specialist Chris Adams. Scroll down for a transcript.

Subtitles are available: Please click “CC” in the video player.

TRANSCRIPT

Chris Adams, Pendal portfolio specialist: Hello and welcome. I’m joined today by James Syme, senior fund manager for the Pendal Global Emerging Markets Opportunities Fund.

James, I wanted to start with something more macro in nature that investors are grappling with internationally. That’s the risk of stagflation. Talk us through your take on the risks of stagflation and potential implications for emerging markets.

James Syme, senior fund manager, Pendal Global Emerging Markets Opportunities Fund:

If we take a step back and look at the nature of Emerging Markets (EM) equity as an asset class, EM equity is a growth asset. It does well when growth is strong, both through the more manufacturing export side of emerging markets (perhaps some of the Asian markets) and also through demand for commodities (perhaps from Latin America, South Africa, Russia, Middle East).

So EM is a growth asset. It tends to do well when the global cycle is strong and the slow growth with stagnation would definitely be more challenging for EM equity.

Then assuming on the inflation side you get a traditional developed market, central bank reaction function where they put rates up in response to the inflation part of stagflation, that would be a difficult environment for Emerging Markets.

Stagflation is in a sense, the worst of both worlds.

So were you to see sustained inflation, and world and central banks hiking rates to deal with that, that would be difficult for EM, because you would see capital flow from Emerging Markets back to the developed world, which would be a drag on economic performance and on market returns.

However, I think firstly, we are clearly in a slightly different developed market, central bank reaction function for now.

You’ve seen much more willingness to accommodate inflation on the upside, whether it’s the Federal Reserve, the ECB, the Bank of England.

So if you do get short-term stagflation, you don’t necessarily get the penalising policy interest rates in the developed world as a response.

Secondly, part of the beauty of EM equity as an asset class is that it is very differentiated at country level. There will always be parts of EM doing well and parts doing badly.

There will always be opportunity within the asset class.

The reason our process works like it is, is to identify which of those countries have the better prospects at that point in time.

So within any stagflation environment, there will be some countries that can do better.

It really depends on which part of the basket of goods and services is driving the inflation.

High oil prices are good for some EMs, not for others. High food prices are good for some and not others.

So there will be winners within the asset class in almost any situation. And that’s part of the beauty of the asset class, and why our process works like it does.

Chris Adams: You’ve got a position in the portfolio in Brazil. Brazil is one of those countries that we have seen hiking interest rates up in the last couple of months in response to inflation. Does this have an impact on your positive thesis around Brazil? Has it changed your view of the country at all?

James Syme: I’d say two things about what we own in Brazil. Firstly, our overweight position is one of the smaller ones in our portfolio, partly because we were concerned about these risks.

We were also cognisant of political risk there.

Secondly, we have a very US dollar revenue / export type portfolio. So we do have some domestic exposure. We have some consumer and transport and travel names. But the bulk of what we own is oil and gas and pulp and paper. So we are less exposed to the domestic economy and more exposed to the global cycle and commodity prices there.

So we haven’t really built a portfolio of very domestic cyclical assets in things like real estate or banking like we have perhaps in some other markets.

Brazil is working exactly as our thesis for how this type of Emerging Market works. Where you have these markets that tend to be higher risk and tend to be more dependent on foreign capital, you get these positive and negative cycles that occur.

So when you get a positive cycle, which is where India is – we also have an overweight in India which is working very well – you’ve seen strong economic recovery in over the last 12 months. And with it, you’ve seen capital flowing in, which strengthens the currency, which depresses inflation and enables interest rates to be kept low, which supports growth. That’s how the cycle works.

So CPI inflation in India is 5.3% [after this interview it fell to 4.35% for September] and is expected to fall in the next couple of months. So India is in a very good place right now.

Brazil has ended up at the moment on the other path. So capital growth is slightly weak, and inflation is slightly higher, capital flows out, that weakens the currency and the weaker currency feeds through to inflation which causes rates to go up — and you’re on the other half of that.

Now we don’t see in Brazil, structural conditions around things like capacity utilisation and unemployment to cause sustained inflationary pressures.

We think when the inflation numbers start to improve, then you’ll start to see capital flowing back in.

(And this is far more about fixed income capital flows, than equity market capital flows.)

But when the capital flows back in, and the Real starts strengthening again, those inflation numbers could come down pretty quickly. Then we may well transition our portfolio from a more external / export-based one to a more domestic one.

So we’ve held off waiting for that to occur. But there’s nothing in Brazil we think at the moment to suggest there’s a sustained inflationary pressure.

So if you’ll permit me to add another EM to my answer, Turkey has inflationary pressures because for the last four or five years, they’ve had this big credit fuel boom, a lot of credit in the economy, big increase in house prices, a lot of consumption, and now they’re feeing the effects of that.

Brazil hasn’t had that as a problem. We fundamentally don’t see the conditions in Brazil of having been in a boom, of having high capacity utilisation and low unemployment that can cause structurally sustained inflation.

So we’ve been cautious within Brazil. What we’re waiting for is that turn. We do believe that the conditions are there for it.

Chris Adams: If we perhaps move from Latin America, go around the globe to Asia, there’s a lot happening in China. Obviously a very large part of the market and plenty going on there. Maybe if we just hone in on one specific aspect, obviously there’s been a lot of headlines around Evergrande, commentary about this being China’s Lehman brothers moment. It’d be great to get your take on Evergrande. Does this present that systemic risk to the Chinese economy?

James Syme: We really don’t think that it does. Firstly, we’ve seen the comparisons in investment commentary in the media with Lehman brothers.

The problem with Lehman was it was so interlinked with everything else. All the other investment banks back in ’08 were all dependent on each other. That’s not really how the property market works.

Evergrande will undoubtedly cause some significant defaults on some parts of debt and there will be pain where those are owned. But those debts aren’t owned, for example, by other property developers.

And where you’ve got domestic debts within the Chinese financial system, firstly, we think there should be easily the capacity to bear it.

The entire Chinese financial system is so big and Evergrande is not hugely material in it.

Secondly, we’re very sure there will be state support or workouts required to protect the domestic financial system. We’re very sure that will be the case.

What we think we’re seeing with Evergrande is really… A lot of the focus on Evergrande is the fact that it’s a real estate business. But we think really the pressure is on leverage.

There’s been a very significant tightening in the last 12 months of monetary policy in China. We had the latest set of credit monthly data in the last 24 hours. Once again we’re even lower than we were before.

So they’ve really trodden on the brakes in terms of monetary policy. They’ve been very clear with some of their specific policies and some of the statements that highly leveraged groups are going to be in trouble. And they are happy I think to let that happen.

What’s happened to Evergrande isn’t a surprise to Chinese policy makers. It’s very clear from the way they had structured their policies – the three red red lines about additional borrowing in real estate developers – that they were saying to these companies, either you recapitalise yourselves and de-lever or you’re going to face trouble.

We think this is a deliberate policy choice. It’s kind of euthanasia for highly leveraged firms. And we are very sure there will be whatever support or workaround to prevent any kind of contagion.

Now that all said about the fact that we’re not about to go into a Chinese version of 2008, the credit money supply data we’ve seen over the last six months or the last year, does suggest a further slow-down Chinese economy.

We think that has implications for what one wants to own in China. We remain very defensively positioned in things like utilities, consumer staples – and in the very quality end of areas like real estate.

It also has significant implications for some global commodities — I’m thinking particularly about metals. Even if you see stronger demand in the developed world, a big continued slow-down in China, we think has to be bad for thgins like iron ore and copper and we have no exposure to those things in the portfolio at al.

Chris Adams: Thank you for that, James. It might be nice to finish up with a brief overview of any changes you’ve made in the portfolio recently, any adjustments in your positions.

James Syme: We’ve mostly been making small changes within some of the names we own. With the big dislocation in China, we have found opportunities to add the names we already own, that we like. That includes one of the real estate names we believe is very much the highest quality, private-sector real estate company in China.

We took the opportuity a couple of months ago to add to that really at what we believe is the lows and it’s made a recovery since.

We have found some consumer names in China as well, which have come down with the market, where we don’t see a justification for that.

I’d say what has been a lot of our workflow over the last couple of months has been looking at some of the developing Covid data and economic data and looking for where there’s potential opportunity.

We’ve been out of Southeast Asia for quite a long time – markets like Indonesia, Thailand, The Philippines.

Those markets are quite dependent on tourism and as we start seeing vaccinations rates increase around the world, including in those countries, there may well be some interesting opportunities there.

So we’ve been preparing to potentially make some changes there.

Chris Adams: Thank you very much for your insights and your time from London this morning James, we really do appreciate it.

James Syme: Great. Thanks Chris.

Chris Adams: Thank you all for joining us. If you have any other questions around the Pendal Global Emerging Markets Opportunities Fund, please don’t hesitate to reach out to your account manager and we will be more than happy to help you.

Thanks for your time. Goodbye.

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Trouble in China is obscuring strong performances in other emerging markets, demonstrating the importance of a country-by-country approach in this asset class, says James Syme

• India, Mexico and South Africa performing well
• With each Covid wave economic impact lessens as economies adjust
• Find out about Pendal Global Emerging Markets Opportunities Fund

INVESTORS in emerging markets have experienced challenges in recent months, but the underlying story is more nuanced.

Falls in the MSCI Emerging Markets Index since February’s peak are almost entirely dominated by shares in China and South Korea — masking strong performances in countries as disparate as India, Mexico and South Africa.

This demonstrates the importance of taking a country-by-country approach to emerging markets investing says James Syme, who co-manages Pendal Emerging Markets Opportunities Fund.

“As we always say, even if emerging markets as a whole is not an opportunity, there’s always going to be individual opportunities within the emerging markets sector,” says Syme.

India is booming

Much of the news coverage of India in 2021 focused on its steep Covid second wave, which in May was killing more than 4000 people a day.

But Covid has subsided and economic stimulus has supported an economic boom.

“Now, we’ve got capital inflows, a rising stock market, rising property prices — India is in this fantastic boom.

“Valuations are challenging — but that represents the fundamental strength of the economy.”

India’s strength is even more impressive given the strong US dollar, high oil price and higher US bond yields, which would normally be expected to lift inflation, blow out the trade deficit and be a drag on Indian stocks.

But inflation in India is contained, coming in at 5.3 per cent to August, versus more than 10 per cent in other emerging markets like Brazil, and the trade deficit is rising slower than economic growth.

“So India looks great. It’s one of our favourite markets and one of our biggest overweights.”

South Africa stronger

Similarly, South Africa has emerged from its political unrest in July to perform more strongly. Its mining sector is growing strongly and the domestic economy is recovering from Covid.

“Traffic stats, credit growth, vehicle sales — they all look pretty strong and there have been big upgrade in growth estimates from the central bank,” says Syme.

Fears of rising Covid cases knocking emerging markets economies off course were misplaced.

“It’s becoming more manageable. With each successive Covid wave, companies and populations and governments learn how to cope.

“The first wave was terrible. There was no toilet roll, no eggs and no one knew what to do.

“Now, if you get another Covid wave every one knows what to do — the kids go home, the lessons are on Zoom, the parents work from home, food delivery picks up again. People adapt.

“With each wave, the economic impact is less because economies adjust to deal with it.”

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About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here