Short-term cycles are a hallmark of Covid | Pendal Group
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Short-term cycles are a hallmark of Covid

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

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.

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“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.

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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.”


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.

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 7, 2021.

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