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Emerging markets aren’t so different to us – but you’ve got to pick the right ones

Emerging markets can offer diversification and stronger growth, but it’s important to take a country-by-country approach, argues Pendal’s JAMES SYME

AS AN asset class, the emerging markets are 24 countries across Latin America, eastern and southern Europe, Africa and Asia that — often contrary to popular belief — are largely well-run democracies with successful economies and large, growing middle classes.

EMs often deliver higher returns than developed markets, though performance sometimes comes at the cost of higher volatility.

“One of the attractors for Australian investors is that emerging markets offer some diversification,” says Syme, who co-manages Pendal Global Emerging Markets Opportunities fund.

“The risks they have are different to the risks in developed markets and there are periods when they can outperform developed markets.

“So for Australian investors who are making an international allocation, having some emerging markets can help diversify some of that risk.

“These are also markets that have generally stronger trend growth rates, so the fundamental growth opportunity you’re buying is often stronger in the emerging world than in the developed world.”

Syme was speaking at a Pendal on-demand webinar, Get ready for emerging markets to re-emerge.

He says there is a common misconception that emerging markets countries are dysfunctional, war torn or burdened with significant health or security issues.

“But they’re generally not that different from us — they just haven’t progressed as far down the path of economic development.

“It’s important to understand that while they’re never the perfect investment opportunity, they are usually not excessively risky or chaotic.”

Origins of Emerging Markets investing

Emerging markets stocks were once difficult to access and generally ignored by foreign investors.

In the 1980s, a World Bank push to promote the asset class encouraged investment and helped finance development.

Since then, the asset class has undergone significant changes.

“The history of emerging markets as an asset class is one of booms, slowdowns and recoveries. It’s important to be positioned in individual countries that offer the better opportunities,” says Syme.

“For example, the size of China has changed beyond recognition. It was about the size of Poland when it originally came in, and now it’s by far the largest market in the asset class.

Find out about

Pendal Global Emerging Markets Opportunities Fund

“There’s also been markets like Argentina that seem to promise a lot but struggle in the longer term.

“And Greece has been an interesting story — promoted to be a developed market, but subsequently had the crisis in 2011 and came back to us.”

Pendal’s emerging markets team employs a country-by-country approach, emphasizing a comprehensive understanding of the economic and political conditions of each individual market.

This approach allows the team to navigate the mixed fortunes of emerging markets.

“It’s a very technical, consistent approach based on getting a clear-eyed view of what’s happening in the economy, principally through the data releases that come out,” says Syme.

“You buy emerging markets for growth, and you buy equities for growth, and so what’s happening the growth environment is a core consideration.

“Right now, we see a number of key emerging markets that have over the last five or seven years had slowdowns in their economies, but we’re now seeing very clear signs of strong acceleration.”

Syme names India, Mexico and Indonesia as the stand-out performers, but cautions that past winners like South Korea and Taiwan are facing a slowdown in their key export markets.

And China? “We have a neutral position. There clearly is going to be a rebound in the Chinese economy because of post COVID opening and because the most unfriendly policies that the administration was pursuing have eased off.

“But without a real estate recovery, it’s hard to see how China can get the economy back to where it was in 2015-16.”

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

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 a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at May 31, 2023. PFSL is the responsible entity and issuer of units in the Pendal Global Emerging Markets Opportunities Fund (Fund) ARSN: 159 605 811. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com


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