Emerging Markets webinar: which countries are looking promising in 2021
Which emerging markets have the fiscal firepower and structural advantages to benefit from the next phase of the global recovery?
James Syme (pictured), co-manager of Pendal’s Global Emerging Markets Opportunities Fund, shares his insights in a new Pendal webinar. This is a summary of the webinar.
- Watch: View James Syme’s Emerging Markets webinar (18 mins, registration required)
- Presentation: Download the webinar presentation (pdf)
- Brochure: Download a Pendal Global Emerging Markets Opportunities fund brochure (pdf)
- Web page: Visit the Pendal Global Emerging Markets Opportunities fund web page
EMERGING MARKETS are at an historic inflection point as the US dollar begins to reverse a decade of strength, setting the scene for a strong rally in regional equity markets.
The US dollar is the currency of choice for at least half of all international trade invoices — around five times greater than the US share in imports — giving the dollar an out-sized role in the global economy.
This means emerging markets are highly sensitive to movements in the US currency, London-based senior fund manager James Syme tells clients in a new webinar. Syme co-manages Pendal’s Global Emerging Markets Opportunities strategy with Paul Wimborne.
“Periods of dollar weakness have led to the great economic market booms in emerging markets,” Syme says in the webinar. “Dollar strength has led to some great stresses in parts of the emerging world.”
The US dollar has been strong since 2011, putting significant stress on parts of the emerging world. But from last year, it has started to enter a period of weakness.
In strong dollar environments since 1989, investors in emerging markets equities have, on average, lost money, Syme says.
“In contrast, the annualised equity return in US dollars since 1989 in weak dollar environments is nearly 27% per year.
“It’s a pattern that still exists – in the last eight months of 2020 with a weaker dollar, emerging markets as an asset class rallied over 40 per cent.”
Still, Syme suggests investors should use care when selecting emerging market investments and should take a genuinely diversified, selective approach to asset selection.
Types of Emerging markets
Syme divides emerging markets into three broad groups:
- High current account deficit markets with high sensitivity to the US dollar like much of Latin America, South Africa and Russia
- Countries with strong domestic demand that are less exposed to the global economic cycle like India and south east Asia
- Current account surplus manufacturing exporters like China, Korea and Taiwan that are significantly exposed to the global economic cycle.
“A genuinely diversified portfolio would contain some exposure to each group but would still have the opportunity to be highly selective,” he says.
Syme cautions that the major indexes may not offer investors true diversification as they become dominated by the mega-cap tech stocks of the region.
Four mega-cap tech stocks – China’s Alibaba and Tencent, Taiwan Semiconductor Manufacturing Company and Korea’s Samsung Electronics – now make up 21.3 per cent of the MSCI Emerging Markets Index.
Many emerging market funds hold all four of the mega-caps, concentrating risk and lifting exposure to China where he is becoming more cautious on the outlook.
China’s regulatory crackdown on Alibaba in late 2020 has the potential to affect the whole sector while US government restrictions are creating a tricky investment environment for Chinese state-owned enterprises.
Taiwan and Korea have much better fundamentals with strong operating conditions, but valuations are starting to look stretched in some parts of the market, particularly in Taiwan.
“If we use consensus earnings estimates as a marker of recovery … we can see strong recoveries in Korea and Taiwan as well as the clear signs of a slowdown in China,” he says.
Recovery in India
Elsewhere, India enjoyed the shallowest earnings downturn in the region during COVID and is experiencing a powerful recovery, Syme says.
“We also know that India has some of the best prospects for coronavirus vaccination. It is the world’s largest exporter of pharmaceuticals and is gearing up for a very significant vaccination program. India is one of our favourite emerging markets.”
South east Asia is suffering from the tourism downturn and the commodity sectors have not made up the shortfall.
On the contrary, the macroeconomic environment is very supportive of the big emerging markets commodity exporters like Brazil, Mexico and South Africa.
“Support for exports from terms of trade, mostly driven by commodity prices and the resulting strong trade balances, suggest that currencies are cheap and that the recoveries we’re seeing in domestic demand could be quite sustained for a long period of time,” he says.
“There is also significant potential for positive earnings revisions, which would therefore have the potential to lift those equity markets.
“These are very positive macro attributes that we think have been ignored by many investors in emerging markets, who have been focused on the large cap tech space.”
James Syme is a senior portfolio manager and co-manager of Pendal’s Global Emerging Markets Opportunities fund.
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