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Emerging Markets: Why some investors may benefit more than others as the tide turns

Emerging markets should benefit as sentiment turns on interest rates and the US dollar.
But some investors are better placed than others. Here’s why

HIGHER US rates and a US dollar have recently curbed Emerging Markets returns, since they tend to depreciate other currencies, weaken US demand and draw capital out of EM economies.

As inflation comes under control, it’s expected that rate rises will decelerate and the US dollar will eventually weaken.

That’s good news for EM investors.

But there is another change that may benefit some emerging markets investors more than others: country-level factors are again becoming a powerful indicator of potential returns.

Investment managers that focus on top-down, country-level analysis should be able to take greater advantage of the changing conditions.


Country factors typically dominate style and industry factors in driving emerging markets returns.

This contrasts with developed markets which tend to have more features in common.

Emerging markets feature a wider range of political systems, demographic trends, industrial composition, resource endowments and economic development.

That’s where Pendal’s Emerging Markets team starts its analysis.

As you can see from these charts, most of the time it pays off:

Country factors (green line) stand out as the highest contributing factor in Emerging Markets investing. Source: MSCI Barra
How contributing factors compare for global equities (Dec 1997 to Sep 2022). Source: MSCI Barra

But these charts also show that during the Covid period extraordinary monetary policy settings and falling bond yields drove the importance of style and industry factors.

This is reversing now and we are seeing country factors reassert traditional dominance.

This has coincided with a strong relative performance with the Pendal Global Emerging Markets Opportunities fund (GEMO), as you can see below:

%3 Months1 Year (pa)3 Years (pa)5 Years (pa)Since inception (pa)
Total return (after fees)9.7131.5511.3712.419.80
Benchmark: S&P/ASX 300 Accumulation Index8.5328.7210.1010.227.96
Performance over / (under) benchmark1.182.831.272.191.84

Source: Pendal, Pendal Global Emerging Market Opportunities Fund – Wholesale, after fees and before taxes. Past performance is not a reliable indicator of future performance. Inception date Nov 7, 2012.

Performance drivers and positioning

This performance has been driven the fund’s strategy of holding countries that are well suited for a given investment environment — and avoiding those that are not.

The fund currently holds only nine of the 24 countries in the index.

These include countries such as Brazil, Mexico and Indonesia which have bucked the trend of broader emerging market weakness.

All three made positive returns in 2023.

Fund managers James Syme, Paul Wimborne and Ada Chan (pictured below) each draw on more 20 years of experience in emerging market investing,

They see clear signals that these markets are shifting into a virtuous circle of upswings in domestic demand which typically drive multi-year periods of outperformance.

A similar environment drove the last surge in investor demand for Latin America (prior to the GFC).

James Syme, Paul Wimborne and Ada Chan (l-r) … fund managers for Pendal Global Emerging Markets Opportunities fund

These economies have taken more than a decade to rebalance and repair.

Now another opportunity emerges.

The fund’s performance has also been helped by the team’s decisions on China.

The fund has been underweight in China as multiple headwinds — including Covid-zero and regulatory pressure on the property sector — weighed on markets.

James, Paul and Ada are keeping a close eye on Beijing, however.

There are signals of a shift in policies that have weighed on the economy and market.

It is too soon to overweight this market. Economic growth, the liquidity and credit environments and the currency outlook all remains negative.

But if policy becomes more supportive this could — in combination with historically cheap valuations — drive an opportunity.

Find out about

Pendal Global Emerging Markets Opportunities Fund

Pendal Global Emerging Markets Opportunities fund’s emphasis on liquidity — and the agility to shift quickly between markets — will be a key factor in taking this opportunity when the time is right.

Emerging Markets outlook

High US rates and a strong US dollar are traditional headwinds to emerging markets as a whole — though as noted above there are countries bucking this trend.

It will take a shift in expectations around the US Fed’s hiking cycle to remove this headwind.

So far Pendal Global Emerging Markets Opportunities fund has been able to preserve capital relative to the benchmark. The fund has returned 0.73% annualised over the last two years, while the market is down 5.88% annualised.

This puts the fund in a relatively good place when the rebound in the asset class comes through.

We expect that, as always, owning the right countries will be important for performance in that period.

This is reinforced by the reestablishment of country factor dominance.

It is also aligned with our country-driven strategy, which has driven long-term outperformance.

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 an independent, 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 December 7, 2022. 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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