5-min video: where we see Emerging Markets opportunities
WE believe the next opportunity in Emerging Markets lies with identifying the rebounds and countries that have lagged.
Here senior portfolio manager James Syme explains why he believes this opportunity will drive a rebound in the relative performance of Pendal Global Emerging Markets Opportunities fund.
Watch this 5-minute video Q&A with portfolio specialist Chris Adams or read the transcript below.
Portfolio specialist Chris Adams: We’re seeing a narrow rally in growth-oriented East Asian tech, which has driven gains in emerging markets.
Since March we’ve had exposure to the theme, but we believe there is more to emerging market growth opportunities than a handful of these stocks.
We believe the next opportunity in emerging markets is identifying the rebounds and the countries that have lagged.
Very few of the 26 emerging markets (EM) have actually outperformed the index this year.
This rebound will occur at different rates at different times in emerging markets, we believe, based on the economic structure and policy options.
James where do you see the specific opportunity to make money in Emerging Markets (EM) from here?
Portfolio manager James Syme: There are two areas of particular interest and the portfolio’s exposed to both of them.
The first is in the countries outside the East Asia, China, Korea and Taiwan space, where we’ve generally seen a lag in performance.
We saw a lot of money leave those markets back in March and April, and that’s only really started to recover.
Now it does feel that November was a real sea change in markets. We saw some strong out-performance from some of those areas including parts of Latin America and including India.
That’s been driven by the pre-existing conditions of low interest rates, a weak dollar and local recoveries; and then new optimism from vaccine news, the change in power in the White House and particularly with a pickup in flows.
So some of those areas we see great opportunity as they go into recovery, which really doesn’t seem to be priced into markets.
Then secondly, in the East Asian space we’ve seen under-performance of Korea relative to China and Taiwan year to date.
Korea is a much more cyclical economy. We saw big outperformance of Korean equities in November and the portfolio is significantly overweight Korea relative to China and Taiwan within that East Asian space.
Chris Adams: I’m assuming Korea is one of your highest conviction positions. Where else are you seeing a lot of conviction with EM at the moment? And why do you think they’ll outperform from here?
James Syme: Within India we’ve seen a big build-up of liquidity and savings in the economy, a big deferral of consumption year-to-date because of the coronavirus lockdowns.
We see some real evidence of a turn in the Indian economy. We’ve seen improving coronavirus data there. We have significant exposure in the portfolio to India.
We’re becoming much more positive on opportunities within Latin America. Mexico is a big beneficiary of the Biden presidency, as well as normalisation and recovery in the US economy and in the Mexican economy.
We’ve moved more positive on Brazil. We’ve moved to a neutral position there. In Brazil we’re seeing an increase in optimism and foreign investor flows. There a few more stages we’d like to see before we went fully overweight Brazil.
But it’s those kinds of markets — markets like India and Mexico and further down the line potentially Brazil — rather than simply adding more and more to the pre-existing tech winners that did so well through the summer.
Chris Adams: Where do you see the largest investment risks clustered within the EM universe at the moment?
James Syme: It’s always the case that the biggest opportunities in markets are where consensus is universally bearish and the biggest risks are where consensus is nearly universally bullish.
There are some great companies in that technology space that have done very well from the effects of the coronavirus, as well as from underlying secular trends.
Within some of those, we’ve seen some extremely heavily owned stocks trading at very expensive multiples. They’re good businesses but it’s hard to see the marginal piece of good news that can drive them even higher.
I think this is a time to be more rotational and contrarian rather than simply trying to rely on those tech businesses getting another 10% better from what already looks like extremely strong operating conditions that have been priced into those markets.
Chris Adams: Do you need to see a large sell-off in some of those tech stocks to outperform or is there something else that’s going to drive relative performance?
James Syme: No, I think particularly if we see a recovery in investment flows into some of these markets like India and Mexico, and some of those other less technologically export-driven markets, we still haven’t seen the recovery from the big unwind in March and April.
I think these markets can deliver good returns in their own rights, irrespective of what happens with the internet and tech space.
James Syme is a senior portfolio manager and co-manager of Pendal’s Global Emerging Markets Opportunities fund.
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