JULY was a strong month for emerging market equities.
The MSCI EM index returned 6.2% in USD terms, with strong gains from some major groups of stocks.
Chinese internet names performed well, including some key portfolio holdings.
Some emerging market banks rose strongly, including portfolio holdings in Mexico and South Africa. Turkish (not held) stocks rose strongly on hopes for more orthodox economic policies.
By far the strongest gains, though, were in parts of the broader technology sector — especially stocks with exposure to electric vehicles or batteries, and stocks that are possible artificial intelligence beneficiaries.
We see multiple signs that there may be excessive optimism in some of these stocks.
We’re not taking a view on particular companies or business models — and we’re not saying these upward moves are finished.
But it’s worth highlighting some of the market dynamics we saw in July:
This has particularly been the case with the Korea EV and battery sector.
These stocks represented nearly half the total Korean stock market turnover on some days in July, driven by retail investor leverage rising to a record 10 trillion South Korean won.
Key to stock selection has been a Korean YouTube presenter Park Soon-hyeok, better known as ‘Mr Battery’.
Six of his eight recommended names rose more than 40% in the month. The strongest of them, Ecopro (not held), was up 1059% this year at the time of writing.
There have also been a raft of new issuance in Korean EV/battery ETFs in recent weeks.
Chinese online education play New Oriental Education (not held) returned 49.8% in July. It’s previously been the subject of short-seller allegations of dishonesty and a crackdown on online education by the Chinese government.
NIO (China, EV, not held) lifted 58% in July, though it’s forecast by consensus estimates to have a net loss of US$2 billion on $8.9 billion of sales this year.
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Nio underperformed XPeng (China, EV, not held), which rose 74% in the same period, despite expectations it will lose $1.2 billion on $4.5 billion in sales.
Oh, and in May of this year Lee Dong-chae, chairman and biggest shareholder in Ecopro, was sentenced to two years in prison for violating South Korean capital market laws.
Posco Holdings (Korea, steel, not held) is one of Asia’s biggest steel producers, with 30,000 employees producing 32 million tons of steel every year.
The company has made some smart investments in green steel technology, and has ongoing investments in EV battery components.
A management update in July was material in driving Posco’s market cap from $24.9 billion to $42.5 billion in the month.
Similarly, exceptionally strong monthly gains (50% plus) were seen in some Taiwanese computer hardware makers, even though they have been reporting declining PC, laptop and server volumes this year.
Investors are hoping server orders from artificial intelligence (AI) businesses are about to follow — even though volumes and margins at this point are unclear.
TSMC (Taiwan, tech hardware, held) is widely recognised as the world’s dominant producer of the high-performance semiconductors that are key to AI.
The stock fell 2.8% in July.
Samsung Electronics (Korea, tech hardware, held) is TSMC’s nearest challenger in high-end semiconductors, as well as a major producer of computer memory, including the HBM type used in AI servers.
The stock fell 0.4% in July.
Technological revolutions in AI and EV are changing the world, but equity markets will not price that opportunity with perfect efficiency.
We are concerned that some parts of the EM equity space look particularly inefficient right now.
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
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