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Emerging markets (EM)

Over the years, we have performed extensive on-the-ground research to understand consumer behavior across China and other emerging markets (EMs), with an emphasis on the two age demographics — millennials and Generation Z — that fuel much of these countries’ total consumption. This is part of what we call our “grassroots” research process.

In keeping with this tradition, we recently conducted our second post-COVID-19 survey of Chinese consumers to get the pulse of consumption and lifestyle trends in the wake of the global pandemic. We targeted respondents in higher-tier Chinese cities, between 20 and 40 years old, with…

I’m often asked lately: Why are you so bullish on emerging markets (EM) equities these days? What makes the story so compelling, and what’s driving it? Let’s take a look, and while we’re at it, I’ll share my latest thoughts on China’s burgeoning A-share market. 

A flood of liquidity, a sprinkle of taper

I believe the broad opportunity set in EM equities is particularly attractive today, fueled in part by the unprecedented amount of liquidity in global markets. China’s was the first EM central bank to begin tightening monetary policy. In the US, real interest rates moved unexpectedly higher recently, which has led to some market tension within EMs between prospects for stronger global growth and whether or not higher real rates will persist. Brazil and Russia are also…

MARKETS
THEMES
Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

The dramatic 2020 US election is finally behind us, but 2021 is not lacking in global political activity of which investors should be aware. For example, the new year brought a busy docket of upcoming elections across various emerging markets (EM) countries. Figure 1 provides our EM debt team’s 2021 election calendar and assessment of the risk of populism in each case.

FIGURE 1

2021 EM elections calendar

Important takeaways

  • Across large parts of the EM landscape, economic growth had already been weak for several years leading up to the COVID-19 crisis. We believe the pandemic’s…
MACRO
Tushar Poddar
Tushar Poddar
PhD
Macro Strategist
London
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Momentous changes have taken place in India over the past 12 months that I believe have helped to fast-track the country’s nascent growth story. It’s now clear that Indian Prime Minister Narendra Modi is going all out to spur an economic renaissance.

Pre-COVID-19, there were some initial signs of positive policy reform in India, notably a substantial corporate-tax cut in 2019. Post-COVID, the Indian government has stepped up these efforts, announcing a flurry of key economic initiatives, including:

  • Farm-sector and labor-market reforms;
  • A potentially huge production-linked incentive scheme;
  • Increased spending on the country’s physical infrastructure; and
  • The unprecedented policy of privatization of public-sector enterprises.

Most recently, the presentation of the country’s annual budget on 1 February 2021 and Prime Minister Modi’s speech on 11 February left no doubt as to his intentions. Never before has…

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Niraj Bhagwat
Niraj Bhagwat
CA
Equity Portfolio Manager
Singapore

With an unstable relationship between the US and China looking like a long-term geopolitical reality, pressure to relocate manufacturing away from China is growing. Could neighbouring India, which has a similar population size and rate of economic growth, be positioned to benefit from the shift?

I believe this is not a realistic expectation. Understanding why requires a quick recap of India’s industrial history.

Constructing — and dismantling — the socialist edifice

In the decades after India gained independence in 1947, while East Asia was opening up to the rest of the world, Indian manufacturing stagnated under a series of protectionist trade policies and a socialist industrial model that stifled competition, discouraged innovation and encouraged downsizing rather than expansion. Labour was protected to the point of dysfunction, while education and skills languished in the hands of a corrupt and inefficient bureaucracy. India’s location did not help — in a historically poor region far from key sea routes, with poor connections with the West and East Asia.

Reform came in the early 1990s when a spike in oil prices sparked by the Gulf War coincided with a trough in remittances from Indians in the Gulf. With FX reserves for imports and debt servicing running dangerously low, a desperate Indian government secured an emergency loan from the International Monetary Fund in 1991. In exchange, the government implemented sweeping reforms to open up the economy.

By the 1980s, India’s growth was accelerating fast. But it was arguably too…

MACRO

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Tushar Poddar
Tushar Poddar
PhD
Macro Strategist
London

When I think of “old school” emerging markets (EMs), I think of Mexico. What started out as an exercise to determine if Mexico could be a “Biden trade” soon turned into my belief that some Mexican equities could perform well going forward regardless of the election outcome.

Mexico is not a “COVID reopening” trade, in my view, because President Andrés Manuel López Obrador (AMLO) neither locked the country down aggressively amid the pandemic, nor took any bold steps to stimulate the market. In fact, by not pursuing deficit spending in response to COVID, Mexico’s balance sheet may hold up better than most EMs’ heading into 2021.

More to the point for investors, some Mexican companies appear to be pivoting toward…

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

In my last blog post from June, I encouraged readers to look beyond China for emerging market (EM) equity opportunities against the supportive macro backdrop of unprecedented global stimulus, a low but improving purchasing managers’ index (PMI), and a weaker US dollar. I recommended that investors favor corporate business models that are likely to deliver resilient, better-than-expected earnings growth going forward.

Fast forward to August: I remain constructive on EM equities overall and believe we are on the cusp of several quarters of EM earnings recovery and upgrades.

What has changed since June?

Back in June, I believed that the countries on the clearest recovery paths from COVID-19 — North Asian markets like China, South Korea, and Taiwan — warranted the largest EM exposures in investor portfolios. At the time, I also suggested that…

MARKETS

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

COVID-19 impact on emerging markets

The pandemic has hit some emerging markets harder than others. In most cases, preexisting macro, debt, and fiscal situations, as well as health care infrastructure, have been key determinants of a country’s ability to cope with the crisis. In this 20-minute audiocast, Geopolitical Strategist Thomas Mucha speaks with members of our Global Macro Team to discuss the outlook for the emerging markets they cover.

video-iframe

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Mary Gillian Edgeworth
Gillian Edgeworth
Macro Strategist
London
Matt Hildebrandt
Matt Hildebrandt
Macro Strategist
Boston
Ludvig Soderling
Ludvig Söderling
Macro Strategist
Boston

Recent global liquidity injections, a low but improving global purchasing managers’ index (PMI), and a weaker US dollar are all contributing to a supportive backdrop for emerging market (EM) equities. To the extent that these trends persist in the period ahead, I believe EM stocks can continue posting attractive relative performance. Now may be a good time to look beyond China for EM equity opportunities.

Recovery paths matter

One encouraging sign is that more cyclical sectors and regions (e.g., travel and bank stocks; Latin America, ASEAN, and Russia) have rebounded along with broader EM equities over the past several weeks, as we have seen…

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Jamie Rice
Jamie Rice
CFA
Equity Portfolio Manager
Boston

The recent acceleration of sovereign-debt defaults in emerging markets (EMs) — three so far in 2020, with more likely to come — reminds me of the less-developed-country (LDC) debt crisis of the 1980s.

In August 1982, Mexico informed its creditors that it was unable to service its US$82 billion of outstanding debt. By October 1983, 27 more EM countries, including 16 in Latin America, found themselves in the same precarious position. Negotiations with international bank lenders dragged on for seven years. The Brady Plan of 1989 finally resolved the debt crisis, marking the onset of the EM asset class as we know it today. By then, however, the decade of the 1980s had been “lost,” with virtually no investment and no…

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MARKETS

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Vera Trojan
CFA
Equity Portfolio Manager
Boston
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