{"id":94762,"date":"2020-05-19T02:00:00","date_gmt":"2020-05-19T00:00:00","guid":{"rendered":"http:\/\/beta.next-finance.net\/opinion\/have-emerging-markets-lost-their-mojo\/"},"modified":"2020-05-19T02:00:00","modified_gmt":"2020-05-19T00:00:00","slug":"have-emerging-markets-lost-their-mojo","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/opinion\/have-emerging-markets-lost-their-mojo\/","title":{"rendered":"Have emerging markets lost their mojo?"},"content":{"rendered":"

Emerging markets have never really been a wallflower in the world of capital market
\nnews. Even with this said, however, the past three years have been fairly extreme in
\nterms of the range of events that have played out in the asset class, and the persistent
\nand overwhelming levels of news flow this has created. The resulting uncertainty,
\nagainst an increasingly challenging global backdrop, has led many investors to ask:
\nhave emerging markets lost their mojo?<\/strong> <\/em><\/p>\n

The only constant is change<\/strong><\/p>\n

Developing economies account for over 85% of the global population, 45% of global GDP[[https:\/\/www.imf.org\/en\/News\/Articles\/2015\/09\/28\/04\/53\/sp020416 – 2016 speech by Christine Lagarde, Managing Director, International Monetary Fund]], and 11% of the MSCI World index[[Bloomberg, MSCI All Country World Index (MXWD), May 2020]]. Historically, returns and growth have been superior to more developed nations, driven by the global competitiveness of these economies to produce certain low-cost goods, services and resources. As a consequence, the development of emerging economies has lifted millions out of poverty and in many instances enabledcompanies in these countries to shift up the value chain, providing increasingly complex products and services. <\/p>\n

The primary drivers of long-term returns have always been different across emerging markets: oil in Russia; infrastructure in India; consumption in China. Over the past three years, news flow has also highlighted a number of short-term differences which have, in many instances, badly hurt investor confidence: China\u2019s trade tensions; Turkish geopolitics; US Russian sanctions; extreme right-wing politics in Brazil; a swing to the left for Mexico \u2013 many markets have traded headline to headline, with investor uncertainty high.<\/p>\n

This feature of the market has been dramatized further by the equity market response to COVID 19. The majority of emerging markets have not been immune to the awful human and economic cost of the global pandemic. However, of the top 10 countries ranked by deaths per capita, not one is an emerging nation, and already in geographies such as mainland China, Taiwan and South Korea there is a gradual semblance of normalisation in economic activity. Despite this, with the very noticeable exception of China, many of the worst performing major equity markets year-to-date are emerging markets.<\/p>\n

Structural development, bottom-up opportunities<\/strong><\/p>\n

While many associate emerging market investment with large factories churning out low cost
\ngoods, the opportunity for equity investors goes far beyond manufacturing \u2013 indeed \u2018industrials\u2019
\nis one of the smallest sectors in the index. Persistent trends providing opportunities for
\ncompanies in these markets include financial inclusion, healthcare penetration, infrastructure
\ndevelopment, rising consumption, and technological innovation. These changing thematics
\nare, for many firms, the dominant driver of long-term returns, far more so than the policy-driven
\nand cyclical events that drive the news cycle. Indeed, there are many company-level examples
\nshowing that fundamental corporate growth in these markets has remained strong, a fact often
\nlost in the noise.<\/p>\n

Company-level opportunities benefiting from long-term structural change include IDC, a
\ndiagnostic firm in Egypt prospering from greater healthcare spend, Netease, a leading Chinese
\ngame developer, proving highly effective competing overseas; Purcari, a Moldovan wine
\nproducer, thriving as disposable incomes rise and consumption trends change in eastern
\nEurope, and Salmones Camanchaca, a Chilean salmon farm operator prospering from greater
\nfish based protein consumption in Asia plus north America. Beyond emerging markets, frontier opportunities can promise even greater structural growth; for instance Kenya Commercial Bank, the economy\u2019s largest bank, operating in an country of over 50 million people with fewer
\nthan 30 thousand mortgages[[https:\/\/data.worldbank.org\/indicator\/SP.POP.TOTL?locations=KE – world banks, 2018]]; or Vietnam dairy, positioned to benefit as per capita
\nconsumption of dairy products rises from a very low base. None of these businesses is immune during periods of macro weakness, but all have demonstrated multi-year growth over-time, are resilient and remain well-positioned to benefit from change in their respective markets. <\/p>\n

Looking beyond the chaos<\/strong><\/p>\n

There is a huge range of possible outcomes for what the shape of the next twelve months will
\nlook like, and the simple truth is that it is too early to tell with real confidence. What we do know
\nhowever, is that valuations for many emerging market companies are currently low \u2013 in
\nabsolute terms against their history, but also noticeably so against many developed market
\npeers. This was already the case prior to the pandemic, and this has only been only been
\nexacerbated by the further exodus of foreign capital from these equity markets.
\nEmerging markets will always be to some degree more \u2018noisy\u2019 than developed markets; not
\nevery good company will be a good investment and there remains a real range of risks in
\naddition to the structural opportunities. However, many companies in these markets have
\nresilient business models and balance sheets coupled with low valuations and attractive
\noutlook driven by structural change, and it is this side of the equation that we believe has been
\noverlooked in recent years.<\/p>\n","protected":false},"excerpt":{"rendered":"

Emerging markets have never really been a wallflower in the world of capital market
\nnews. Even with this said, however, the past three years have been fairly extreme in
\nterms of the range of events that have played out in the asset class, and the persistent
\nand overwhelming levels of news flow this has created.<\/p>\n","protected":false},"author":1,"featured_media":94760,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1809,1655,1651,1437,2087,2068,2239],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/94762"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=94762"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/94762\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/94760"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=94762"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=94762"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=94762"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}