Here are the main factors driving the ASX this week according to Pendal investment analyst GRAEME PETRONI. Reported by investment specialist Chris Adams

• The Fed and BoE cut rates by 25bps, the RBA remains unchanged
• Economists modelling various scenarios for Trump’s policies
• Find out about Pendal Focus Australian Share Fund

IT was a big week for markets following the US election.

The S&P 500 rose 4.69% on pro-growth policies around tax cuts and deregulation.

Bond markets stabilised after sharp moves higher in the lead up to the election, with the outcome suggesting a lower trajectory for US rates.

Trade tensions dragged on Europe, while China benefited from optimism in the lead up to the NPC meeting, which ultimately failed to deliver on expectations.

The Australian market echoed the US with respect to financials, tech and cyclical industrials outperforming, while taking a more cautious approach to resources – with the S&P/ASX 300 closing the week up 2.23%.

While macro moves dominated, there was a fair amount of news flow, particularly from bank reporting season.

Banks reported solid results but without any further follow through on the positive thematics that had been building around margins and balance sheet.

US election

The US election is widely regarded as having been won on the economy. The catch cry “are you better off than you were four years ago?” clearly resonated.

It looks likely to be a clean sweep of the popular vote, electoral college, Senate and House, potentially giving Trump a mandate for reform. However, the House is close and the Senate lead is slim, which may put some constraints on passing legislation.

Trump talked about some big policies throughout his campaign, like a significant lift in tariffs (50-60% on China, 10-20% rest of world), tight immigration controls (15-20 million deportations) and lower taxes (extend 2017 cuts, no taxes on social security, overtime and tips).

But in his post-election speech, there was no mention of tariffs or China and references to immigration were dialled down (“we’re going to have to let people come into our country… but they have to come in legally”).

This illustrates significant uncertainty on the extent to which Trump’s campaign policies are implemented.

Economists have modelled various scenarios.

If tariffs are limited to 20% for China and 5% for the rest of world, and if net migration only moderates to 500,000 per annum, the inflationary impact is contained to 0.5 percentage points (ppt).

There is also a negative growth impact, but this would potentially be offset by taxes and deregulation.

The end outcome for the Federal Reserve (the Fed) is estimated to be two to three fewer cuts in 2025, potentially implying US cash rates don’t fall much below 4%.

However, this will depend on the degree to which campaign policies are pursued.

The directional impact of Trump policies is clear: bad for bonds, supportive for equities (at least in the near term), some volatility risks, positive for financials, and negative for property, resources and US homebuilders.

Markets have moved a long way in a short space of time and there are still a lot of unknowns to play out.

US interest rates

The Fed played a straight bat, continuing with a 25-basis-point (bp) rate cut (4.50%-4.75%) and making only minor changes to statement wording.

In response to questions about post-election policy impacts, Chairman Powell made it clear that the Fed would not pre-empt changes, saying “we don’t guess, we don’t speculate, and we don’t assume”.

On the outlook, Powell noted that the labour market had cooled and that the Fed was alert to any further deterioration.

There was also confidence expressed that inflation would reduce to target.

Against this, economic growth has been stronger than expected, and Powell said the Fed was starting to think about when to slow the pace of cuts.

This suggests consecutive cuts for now, slowing into 2025.

US economic data

US economic data remains reasonably strong, though there are some mixed signals for the labour market:

Initial jobless claims were benign, with 221k per consensus, continuing to moderate.

• The Michigan Consumer Sentiment Survey was published, covering the two weeks before the election. The index resumed its uptrend, lifting from 70.5 to 73.0 over the month (above consensus of 71.0). This was despite a 0.5 ppt dip in current conditions to 64.4 – more than offset by a surge in expectations to 78.5.

• The ISM Services Index lifted from 54.9 in September to 56.0 in October, which was above consensus of 53.8 and could suggest a pickup in the economy. However, the index appears more consistent with stability in Services spend rather than an acceleration. And within the ISM Services data, the price paid index remains supportive of a moderation in inflation.

• Non-farm productivity increased 2.2% (annualised) in the third quarter. This slightly missed consensus of 2.5% but the prior history was revised up, pointing to strong post-Covid productivity gains. Within the data, unit labour costs increased 1.9% (annualised) in the quarter, which is a potential concern for inflation. But the index has tended to be heavily revised over time and other indicators point to a softening of the labour market.

• Initial jobless claims were benign, with 221k per consensus, continuing to moderate.

UK interest rates

As widely expected, the Bank of England Monetary Policy Committee cut the official rate 25bp to 4.75%.

Growth and inflation forecasts for 2025 lifted sharply following the UK Budget.

While guidance was retained for a gradual approach to policy easing, this is now subject to “evolving data” rather than “absent material developments”.

This suggests a pause in December and modest pace of cuts through 2025.

However, trade tensions could pose a risk to growth and increase the case for cuts over the course of 2025.

Australian interest rates

The RBA left the cash rate unchanged at 4.35% (in line with consensus) and made minimal changes to its outlook.

From the RBA’s perspective, restrictive policy settings are having their intended effect, with inflation moderating.

Household consumption has slowed, but with an offset from public spend.

The RBA made the point that local rates had never risen as much as in other developed countries, and even with cuts offshore (from the US, UK, EU, Canada, New Zealand), rates here remain less restrictive.

Reflecting this, it noted that inflation hasn’t moderated as sharply as offshore and labour markets remained relatively tight.

The market continues to debate when the local rate-cutting cycle will begin – whether early or mid-2025.

The RBA is not expecting inflation to reach the top of its band until late 2025, with the middle to be reached in late 2026.

But there is potential for US tariffs on China to have a negative flow through domestically, depending on China’s response.

China policy

If the US imposed the full 60% tariff on China, the impact to China is estimated at -2ppt of GDP.

This would fall to sub -0.5ppt in the event of a 20% tariff, with the potential for this to be offset by currency depreciation and fiscal policies. However, we have yet to see a fiscal response.

On Friday, the National People’s Congress (NPC) Standing Committee announced a RMB 10 trillion increase in the local government debt resolution over the next four years.

This should reduce local government interest costs and gradually improve infrastructure investment.

But there was nothing on the RMB 2 trillion worth of fiscal initiatives that had been speculated on in the press to cover bank recapitalisation and stimulate consumption.

Perhaps this is not surprising; the NPC is designed to approve pre-proposed policies – not launch new ones.

Policymakers will review fiscal budgets at the Economic Work Conference in December. Any announcement would then be communicated at the Two Sessions meetings in March 2025.

Given domestic weakness, in addition to any export threats, there is clear pressure to act.

US reporting season

Some 84% of S&P 500 companies have reported, with the largest stock – Nvidia – yet to come.

The frequency of beats returned to a more normal 51%, down on recent quarters.

Consensus EPS revisions are also back to a more normal trend.

Typically, consensus is downgraded as the year progresses, which we’re starting to see again for the “S&P 493”, excluding the Mag 7 stocks.

By sector, tech and financials were among the better performers while real estate, materials and energy struggled.

Markets

Australian non-bank financials reacted more positively than banks to the US election result, given more direct earnings leverage.

Effectively, the election helped solidify a 60-80bp move in bonds, which had yet to be reflected in share prices.

Among the banks, ANZ and CBA fared slightly better as they previously had more to lose from a fall in cash rates, given ANZ’s unhedged exposure to US institutional deposits and CBA’s very profitable domestic deposit book.

As a sector, banks could yet benefit from a rotation away from resources given disappointment on China stimulus, but reporting season was not particularly inspiring.

Bank reporting

Heading into results, the market was looking for upside on margins and/or the balance sheet, but neither came through.

Core margins were flat to down slightly, with guidance for similar outcomes given the ongoing mix shift in business deposits and emerging mortgage competition.

Credit quality deteriorated, most notably for NAB, where provisions are now being released to offset problem loans instead of being released to profits, as was hoped.

Capital initiatives were piecemeal, with sizeable buybacks appearing a 50/50 proposition given stretched payout ratios and the limit now being reached on optimisation initiatives.

Overall, there was nothing untoward, but no bottom-up catalysts for further sector outperformance.

 

Some Chinese stocks are looking good value. But you need to think differently about value investing in emerging markets explains PAUL WIMBORNE

• Important catalysts to realise value are missing in China
• Value in emerging markets should be assessed differently
• Find out about Pendal Global Emerging Markets Opportunities fund

ARE Chinese stocks good value?

“It’s a question we’re getting asked by a lot of clients,” says Pendal’s Paul Wimborne.

The MSCI China index has halved since its peak in February 2021. Falls of that magnitude in developed markets soon attract bargain hunting buyers that sow the seeds of the next bull market.

But does the same thesis hold for China?

“The answer to that question at the moment is no,” says Wimborne, co-manager of Pendal Global Emerging Market Opportunities Fund.

“The reason for that is we think value in emerging markets should be assessed very differently than in the developed world.”

A value stock is one that trades at an attractive price relative to fundamentals like its earnings, dividends or assets.

Many Chinese stocks appear to fit the bill, including internet leader Alibaba and telecommunications giant China Mobile.

Both are trading at single-digit price earnings ratios with strong balance sheets and good quality earnings.

But the appearance of value is only part of the investment story, says Wimborne says. Investors also need to be able to realise that value.

Three catalysts for realising value

“In the developed world, you have three strong catalysts for the realisation of shareholder value:

• Strong corporate governance
• Minority shareholder rights, and
• Entrenched culture of merger and acquisition activity

“These catalysts ensure the realisation of value when a company’s shares are not doing well.

“In the emerging world, we think these catalysts are often lacking.”

Alibaba — once a popular and strongly performing stock for western investors — is a prime example of how value can be illusive, says Wimborne.

“For starters, foreign entities are not allowed to own Chinese internet businesses, so Alibaba has to have this strange ownership structure — a variable interest entity, where shareholders have economic but not legal control.

“Management can decide what they want to do with the business and minority shareholders have no way of exerting any control or influence over what management does with free cash flow.

“The business throws off a lot of free cash flow, but we struggle to see how minorities will actually get hold of any of it.”

This is exacerbated by China’s closed capital account that stops money moving freely in and out of the country.

“Alibaba would need the permission of the Chinese government to be able to send that money offshore to foreign shareholders.

“We think it’s extremely unlikely that the Chinese government would approve significant dividend payments that would catalyse value for Alibaba.”

Wimborne says these concerns hold true for other emerging markets as well.

Take care in South Korea

“South Korea is another example where value has not worked well.

“Corporate governance is not well entrenched in South Korea.

“The family-run chaebol industrial conglomerates have had little consideration for other stakeholders — such as minority shareholders — in order to develop the economy over the past 60 or 70 years.

“It’s starting to improve at the margin, but minorities do not get treated as well as they should, relative to developed markets. As a result Korea trades at big discount to other emerging markets.”

Investors in emerging markets need to be aware of these kinds of local specifics and not simply apply western ideas to developing countries.

“The way we run our portfolios is very top-down, country-specific — looking at the country’s history, its economic outlook and its equity culture to determine where we think the potential returns will come from.

“Part of that is assessing each country’s corporate governance, its treatment of minority shareholders in general, and the culture of rewarding equity holders.”

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About Paul Wimborne and Pendal Global Emerging Markets Opportunities Fund

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

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

Indonesia seems to have the right natural resource endowment and policy mix to prosper, argues Pendal’s JAMES SYME

• Indonesia looks promising for EM investors
• Strong demographics support confidence
• Find out about Pendal Global Emerging Markets Opportunities fund

INDONESIAN equities 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.

Emerging markets (EM) investors have faced tough going in 2022 as the once-booming Chinese economy slows and a rising US dollar draws capital away from developing economies.

But commodity-exporting economies have prospered.

Brazil, Mexico and the oil-rich Middle East have been this year’s standouts — and Indonesia is well-placed to join that list says Syme, who co-manages Pendal Global Emerging Markets Opportunities fund.

Pendal’s EM team follows a top-down, country-driven allocation strategy, analysing factors such as a country’s economic growth, monetary policy, market liquidity, currency, governance, politics and equity market valuation.

“Energy balance is a huge determinant of what happens to countries in 2022, says Syme.

“Indonesia is a very significant coal exporter. Coal was 17 per cent of all exports in the first half and coal prices have been extremely well bid globally.

“There’s been a shortfall of production and it’s a major substitute for oil and natural gas in electricity generation around the world, so Indonesia has benefited from both volumes and prices of coal.

“Indonesia is also a major oil and gas producer. A lot of that gets consumed domestically, but at the margin it’s an exporter as well.”

And it’s not just energy. Indonesia is 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.

“So really across the board, we’ve seen strong drivers for Indonesian exports,” says Syme.

“As in Brazil, as in South Africa, as in Mexico, that underpins the terms of trade, it underpins the current account balance, and it enables growth to be stronger.”

An urbanising nation

Terms of trade — the ratio of export prices to import prices — is crucial to emerging markets where economic growth is chiefly funded through exports or foreign capital flows.

The higher US dollar in 2022 has made capital flows harder to come by but strong commodity prices have supported exporters.

Syme says Indonesia’s attractiveness goes beyond its status as a commodity exporter.

It is world’s fourth most populous country with 270 million people and is rapidly urbanising with a burgeoning middle class.

“Productivity and disposable incomes increase when people move from the countryside to the city,” says Syme.

“Indonesia has extremely attractive demographics in terms of both labour supply but also domestic demand.”

Policy is also supporting investment confidence.

Bank Indonesia, the country’s central bank, has considerable foreign exchange reserves and has successfully intervened to support the rupiah, which has kept a lid on inflation.

“It means that inflation is still below 6 per cent and although the central bank has been hiking, they haven’t had to do the big rate hikes that we’ve seen in some other parts of the world.

“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.”

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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

Declines in emerging market stocks offer the potential for strong gains once the US rate rise cycle peaks, argues Pendal’s JAMES SYME

• Long-term Emerging Markets story remains intact
• Look to Latin America, South Africa, Southeast Asia, India
• Find out about Pendal Global Emerging Markets Opportunities fund

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

Emerging markets are down from their 2021 peak as tighter US monetary policy drives the US dollar higher, while a weak Chinese economy dampens global growth and geopolitical instability roils growth assets.

But investors that keep an eye out for signs the sell-off is ending could be rewarded with a strong rally, argues Syme, who co-manages Pendal’s Global Emerging Markets Opportunities fund.

“Over the long run, in US dollars, emerging markets equities return a significant premium to the developed markets,” says Syme.

“In pure financial theory terms, that’s the reward for the extra volatility it brings – excess return compensates for increased risk or reduced liquidity. Emerging markets are more volatile, but tend to have a higher reward over the longer run.”

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

In the GFC of 2007-08 emerging market stocks fell 60 per cent, while the 1997-98 Asian financial crisis saw EM decline 58pc.

What’s driving Emerging Markets

Three main factors have driven this year’s declines, says Syme.

“The big one has been tightening of global liquidity and the end of quantatitive easing by central banks.

“Related to that is the huge rally in the US dollar. That means other currencies have been weaker, which causes a weaker price performance for EM shares in US dollars, but it’s also reflective of where capital is flowing.

“A strong dollar is an indicator of money flowing out of the rest of the world and into the US and that’s always going to be challenging for emerging markets.”

The second factor is weak Chinese growth amid Beijing’s zero-COVID policy and crackdown on the real estate sector.

“And the last part is a perception of increased global geopolitical risk with the Russia-Ukraine conflict and the colder China-US conflict.

“Those factors create the perception of a riskier environment for international investing in high-risk countries – it’s much easier to own some US treasuries.”

Signs to watch

Investors are watching for signs these three factors may be easing.

“What’s it going to take to end the sell-off and make EM equity attractive as an asset class again?

“One thing would be a change in direction from the US Federal Reserve and a weaker dollar.”

Faltering rallies in recent weeks indicate markets have been looking for that change in direction from the Fed and any suggestion the US economy is softening.

“We have certainly seen in other developed markets that central banks are starting to move away from tightening – we had a super-dovish quarter point hike from the RBA and emergency bond-buying from the Bank of England.”

An improvement in China’s economy could also mark the turning point for emerging markets.

“We’ve seen signs of shifts in China – credit growth is improving, and we’ve seen corporate borrowing starting to pick up.”

Ending the zero-COVID policy would also be a good sign.

“I don’t think that’s likely to come as a single announcement. But they are letting the Beijing marathon go ahead with 30,000 runners – that’s an interesting step forward.”

And finally, any signs of a change in the Russia-Ukraine war would be a potential positive.

EM countries to watch

When things turn around, investors should stick with the markets that have best weathered the downturn.

These include Latin America, South Africa, Southeast Asia and India, says Syme.

“Right now, there are parts of the asset class that are doing OK.

“The things you’d want to own when we get to the turn are the ones already winning.”

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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

Mexico is often overlooked by investors — but could be a buying opportunity right now, says Pendal Emerging Markets portfolio manager JAMES SYME

• Mexico looks a good opportunity for EM investors
• Valuation of the bourse at a 10-year low
• Find out about Pendal Global Emerging Markets Opportunities fund

EMERGING MARKETS provide opportunities for investors with a greater risk appetite.

China, Brazil, Turkey, parts of Latin America, South Africa and Russia have provided buying opportunities at different times in recent decades.

What about today, in a rising interest rate environment when there’s the potential for a recession in Europe and the United States?

Mexico is well worth considering, says James Syme, senior fund manager at Pendal. “It’s a market that’s often overlooked.”

Pendal’s approach to emerging markets is to consider the macro-economic outlook (top down) and marry that with stocks that meet valuation criteria (bottom up). Using that approach, Mexico is looking attractive, Syme says.

“In parts of the emerging world, we have seen very big rate hikes in the last 18 months. Mexico has done 525 basis points since May of 2021. Longer bond yields have moved and there’s been a more than doubling of the risk free rate in the country.

“People are still waiting for a downturn in the Mexican economy, and we haven’t seen that. Its because Mexico is a beneficiary of a strong US economy, and the US remains really robust.”

Mexico benefits through its exports, particularly vehicles and automotive parts, and computers. Industrial production in Mexico continues to beat expectations.

The country also has a large diaspora, and it benefits from remittances sent back home.

“The vast majority of Mexicans who work abroad send money back home, and remittances are at record highs,” Syme says.

While domestic demand hasn’t matched external demand, Syme says one tends to feed through to the other.

And given rates have risen sharply already, and the economy has withstood the tightening of monetary policy, then Mexico could flourish.

Strong peso

Another factor auguring well for Mexico is the strength of the currency. While the euro has recently traded around 20-year lows against the greenback, and the pound sterling and Australian dollar have fallen to two-year lows, the Mexican peso has mostly been stable.

“That’s pretty impressive … and rational given the strong trade links between the US and Mexico. We think that on a current account basis, the peso still looks fairly cheap.

“Mexico also has a central bank extremely committed to inflation targeting, which should give investors more confidence,” Syme says.

What about sovereign risk and political risk in Mexico?

“Mexico defaulted on its debt in 1994 so you can’t say there’s no sovereign risk. But Mexico is investment grade from a credit point of view,” Syme says.

“Political risk is more of a stress point. There is a fairly left wing, populist, anti-market President in Andres Manuel Lopez Obrador that has centralised power into the presidency and sought out institutions who might oppose him.”

Syme says while the political landscape is far from perfect, the next Presidential election is July 2024, and AMLO, as he is known, can’t run again.

“Also, Mexico has strong institutions, and its politics are relatively stable. It’s a case of being alert, but not alarmed,” he says.

At the micro level, there’s been a large number of stocks, both domestic and export focused, that have provided positive guidance, or upgraded earnings, Syme says.

“Yet there’s been market weakness, alongside everywhere else.” The main Mexican index, the S&P/BMV Total Mexico Index is down about 15 per cent from its high of late March.

“The price-to-earnings ratio of the Mexican market is at a ten-year low, excluding a brief period around March 2020. And the dividend yield is at a 10-year high,” Syme says.

“And this at a time when the bulk of rate hikes have probably been done, the economy is strong, and we have positive views on the valuation of the currency. Mexico could be a great opportunity.”

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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

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

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