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A Spotlight On: The emerging trends from the emerging markets

04 Jun, 2024 | Return|

In our latest ‘Spotlight on’ panel, we discussed key topics surrounding emerging markets in 2024. Amaya Assan our Head of Fund Origination and expert in the emerging markets universe was joined by James Donald from Lazard's Emerging Market Equity Strategy, John Malloy from the Redwheel Global Emerging Market Strategy and Raheel Altaf, the lead manager for the Artemis SmartGuard Global Emerging Market Fund.

Key takeaways:

  • The current dynamics in China’s stock markets are providing some pockets of opportunity for investors.

  • India is one to watch for investors, with sectors like travel and utilities offering growth at reasonable valuations.

  • In the medium term, our panel were positive on tech opportunities in Korea and Taiwan and the outlook for LatAm, particularly on commodities across the region.

Watch the full panel discussion below:

 

China's market dynamics

It seems that many investors have been extrapolating China's current economic growth and geopolitical uncertainties into the future, without considering the possibility that there could be improvements to come. Tremendous market pessimism remains, therefore, as economic growth has slowed, and the property market is still struggling. Consumer consumption is also, crucially, low with the population spending less. Yet, post-COVID, there has been a shift from regulatory focus to improving economic stability with a view to stabilise both the property and employment markets. Much of the market pessimism has been priced into valuations which are now at decades-low levels, helping to make China particularly interesting in terms of risk and reward. Many undervalued world leaders are now excellent investment opportunities. Interestingly, capital allocation is shifting towards shareholder returns, with more buybacks and dividend policies. Furthermore, it’s important to remember that China remains a major equity market with thousands of investable companies. However, the geopolitical risks shouldn’t be ignored particularly at a time when tensions between the US and China remain high. That being said, arguably, both the US and China recognise their mutual dependency, reducing the likelihood of drastic policy changes like high tariffs. In terms of the upcoming US election, it’s important to remember that election results often impact markets less than expected and that political events can create opportunities for disciplined investors. Regarding specific opportunities, investments in areas like electric vehicles, new energy solutions, and AI all show potential. Innovation in electric vehicles has been significant, with companies like NIO, Li Auto, and XPeng, along with incumbents like Geely, driving down prices and improving quality. Crucially, this innovation is not fully understood by the market. Elsewhere, despite the market’s downturn, the logistics business Sinotrans, has seen its share price almost double, and much of that return has come from cash being paid back to shareholders. Finally, Chinese banks and consumer companies are highly profitable yet undervalued while internet platform stocks are now introducing dividends and share repurchases.

Opportunities in India

From a valuation standpoint, the Indian market is richly valued. The economy is experiencing political stability and significant infrastructure spending, with much room for future growth. However, the market's aggregate valuations are higher than the US, suggesting some areas might be overvalued. Furthermore, the market could struggle if China's economy rebounds.

Other opportunities do remain, though, especially in the travel sector. Companies like IndiGo, have strong growth potential at reasonable valuations. Opportunities also exist in undervalued sectors like utilities, commodities, and infrastructure beneficiaries. For example, Power Grid is the largest electricity producer in the country, growing at a rate similar to high-growth companies, but trading at about a third of the market multiple.

Latin America's market potential

Latin America faces economic pressure with high interest rates, but many companies are in good shape with decent profitability and free cash flow yields. Trends are attractive, and if economic growth accelerates, it could attract more investors. For instance, the industrial sector, such as Cemex in the cement industry, offers opportunities. Basic materials like cement and steel are essential for infrastructure and trade at reasonable valuations. In fact, both the commodity and materials sector are currently underinvested.

Looking at specific countries, Brazil has lower inflation than parts of Europe and high real yields, making it an attractive destination for capital. The Brazilian real has performed well, as, like other Latin American economies, there was proactive inflation management. Importantly, as there have been concerns recently that there won't be an easing story from the Federal Reserve, Brazil still has quite a margin of safety to continue down that path of easing. The demand for commodities and Brazil's attractive geopolitical position—trading with Asia and North America, without the issues faced by Russia or the Middle East—explains the record trade balance levels. The demand for commodities has been robust, making the Brazilian market particularly appealing.

Opportunities in tech and emerging markets

In tech, last year's bull market saw Taiwan perform extremely well, with some spillover into Korea. The company, Hynix, performed well within the high bandwidth memory market. Another option, Samsung Electronics, is the largest memory producer in the world. While they are slightly behind Hynix in high bandwidth memory, they should catch up. The handset business is also poised for another replacement wave of smartphones, driven by new technologies from Apple and Samsung. Additionally, the Korea Value-Up program could significantly impact Samsung, increasing dividends, buybacks, and overall valuation due to government pressure. This program is positioned to have a substantial impact, similar to what has been seen in Japan.

Outlook and risks

In a world with significant geopolitical risks, many investors avoid emerging markets. However, economic risks, such as trade concerns, are arguably less worrying. For instance, the US election will create noise, especially focused on China, but the unsynchronised global economy provides balance, which equity investors should welcome.

Furthermore, as the US economy softens, emerging market economies' growth premium will increase, potentially capping dollar strength and benefitting emerging markets trading at reasonable valuations with strong fundamentals. Plus, with the Fed's job largely done, easing monetary policy will drive emerging market currencies and money flows, benefitting banks, insurance companies, and consumers. In fact, the current period is reminiscent of past fertile grounds for emerging market outperformance.

It's understandable, though, that people are pessimistic about emerging markets, particularly China, due to disappointing returns. However, maximum financial opportunity often coincides with maximum pessimism. China and emerging markets are, therefore, presenting an opportunity. These markets have depressed valuations and strong growth drivers, with self-sufficiency and resilience against geopolitical concerns. Investing in good businesses at reasonable prices, aiming for attractive cash flows and through-the-cycle performance, remains key. Finally, emerging markets offer diversification, especially with domestic-focused companies gaining prominence in a world experiencing a reverse in globalisation trends.

 

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