Emerging Market Equities: The Road to Recovery
By: Rahul Chadha, Chief Investment Officer (HK) and Malcolm Dorson, Senior Portfolio Manager (US)
- Catch-up Opportunity: Despite strong recent performance, and a supportive environment in the form of a weaker US Dollar (USD), lower volatility, and relatively stable 10-year treasury yields, Emerging Market (EM) equities remain significantly under-owned by global equity investors. This underweight positioning combined with discounted valuations, higher growth rates, and higher dividends provides an interesting catch-up opportunity.
- The US Dollar: EM Equities have historically gained roughly 4% for every 1% downwards move of the USD. Prospects of a weaker USD could signal healthier balance sheets, lower interest expenses, and higher earnings revisions – all positives for EM equities.
- The Long-term Consumer Tailwind: EM remains in the nascent stage of a powerful structural change that could lead to significant domestic growth for many years to come. This fundamental opportunity parallels US growth seen in the second half of the 20th century from the 77 million “Baby Boomers” born between 1946 and 1964. By 2025, EM is expected to boast 3.2 billion middle-class consumers with rapidly adjusting spending habits and standards of living.
- Asia ex-Japan: China, South Korea, and Taiwan’s ability to lockdown and contain COVID-19 rates early on allowed their economies to normalize quicker than others, leading to market outperformance through 2020. Overall, we see bright prospects in Asia ex-Japan via leading companies that focus on domestic consumption in China, attractive valuations behind a powerful structural story in India, the continued cyclical recovery in South Korea, and supply chain growth in the Southeast Asia region.
- Latin America: As a region, Latin America stands at a crossroads. We believe the region should benefit more than any other region from a COVID-19 recovery, stronger commodity prices, a weaker USD, and growing demand from the US and China. On the other hand, Latin America faces significant political uncertainty going into the second half of 2021. We believe the region presents a dynamic investment landscape where active management, a focus on quality, and sound risk management are paramount.
- Eastern Europe, Middle East & Africa (EEMEA): EEMEA looks well-positioned moving into the second half of 2021 due to a combination of cyclical exposure, support from EU funding, and recoveries in tourism and travel as vaccination rates in the region accelerate.
 U.S. Census Bureau, U.S. population born between 1946 and 1964
 The Brookings Institution, “The Emerging Middle Class in Developing Countries”, 2017
The views and information discussed in this brochure are subject to change and may not reflect the current views of the writer(s). The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation.
Past performance is no guarantee of future results.
Investment Considerations — There can be no guarantee that any strategy (risk management or otherwise) will be successful. All investing involves risk, including the potential of loss of principal.
Emerging Markets Risk — The risks of foreign investments are typically greater in less developed countries, which are sometimes referred to as emerging markets. For example, political, legal and economic structures in these country may be changing rapidly, which can cause instability and greater risk of loss. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluation, which could hurt their economies and securities markets. For these and other reasons, investments in emerging markets are often considered speculative. Similarly, investors are also subject to foreign securities risks including, but not limited to, the fact that foreign investments may be subject to different and in some circumstances less stringent regulatory and disclosure standards than U.S. investments.
Market Disruption and Geopolitical Risk — Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, natural and environmental disasters, systemic market dislocations, public health crises and related geopolitical events have led, and in the future may lead, to increased market volatility, which may disrupt U.S. and world economies and markets and may have significant adverse direct or indirect effects on the value of a Fund and its investments.