INVESTORS in emerging markets have experienced challenges in recent months, but the underlying story is more nuanced.
Falls in the MSCI Emerging Markets Index since February’s peak are almost entirely dominated by shares in China and South Korea — masking strong performances in countries as disparate as India, Mexico and South Africa.
This demonstrates the importance of taking a country-by-country approach to emerging markets investing says James Syme, who co-manages Pendal Emerging Markets Opportunities Fund.
“As we always say, even if emerging markets as a whole is not an opportunity, there’s always going to be individual opportunities within the emerging markets sector,” says Syme.
Much of the news coverage of India in 2021 focused on its steep Covid second wave, which in May was killing more than 4000 people a day.
But Covid has subsided and economic stimulus has supported an economic boom.
“Now, we’ve got capital inflows, a rising stock market, rising property prices — India is in this fantastic boom.
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“Valuations are challenging — but that represents the fundamental strength of the economy.”
India’s strength is even more impressive given the strong US dollar, high oil price and higher US bond yields, which would normally be expected to lift inflation, blow out the trade deficit and be a drag on Indian stocks.
But inflation in India is contained, coming in at 5.3 per cent to August, versus more than 10 per cent in other emerging markets like Brazil, and the trade deficit is rising slower than economic growth.
“So India looks great. It’s one of our favourite markets and one of our biggest overweights.”
Similarly, South Africa has emerged from its political unrest in July to perform more strongly. Its mining sector is growing strongly and the domestic economy is recovering from Covid.
“Traffic stats, credit growth, vehicle sales — they all look pretty strong and there have been big upgrade in growth estimates from the central bank,” says Syme.
Fears of rising Covid cases knocking emerging markets economies off course were misplaced.
“It’s becoming more manageable. With each successive Covid wave, companies and populations and governments learn how to cope.
“The first wave was terrible. There was no toilet roll, no eggs and no one knew what to do.
“Now, if you get another Covid wave every one knows what to do — the kids go home, the lessons are on Zoom, the parents work from home, food delivery picks up again. People adapt.
“With each wave, the economic impact is less because economies adjust to deal with it.”
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.
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