Emerging markets sustainable equities | Q&A with Juliana Hansveden
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Q What is the outlook for emerging market equities? Where do you see the opportunities?
2023 has been an unusual year, with very narrow stock-market leadership. Only energy equities and parts of the technology sector performed well.
Overall, markets have become quite short-sighted. Consequently, areas where we see exciting long-term potential, particularly for sustainable investors, have been beaten up. These include companies that are contributing to digital and financial inclusion, which have been hit hard by rising interest rates. In the longer term, I expect these companies to grow strongly as software adoption accelerates, commerce in emerging markets shifts online, and as more people are brought into the financial system.
In my view, current market weakness is presenting great opportunities to build exposure to areas of structural growth like these at appealing valuations. Alongside financial and digital inclusion, other sustainable investment areas where we see significant structural-growth potential include decarbonisation and healthcare, as well as consumer goods delivered in a sustainable way to the growing middle income classes.
Q Given the market backdrop, why take a sustainable investment approach to emerging equities?
From a cyclical perspective, the global economic outlook is uncertain at best. A sustainable investment approach is a way to tap into the longer-term structural trends that are transforming emerging markets.
For example, a quarter of the world’s population, about 2 billion individuals, still do not have access to even a bank account. That’s just the start. Many people in the emerging world also need insurance, savings products, digital payment systems and so on. Meeting these needs presents fintechs and other companies with a growth opportunity that will persist for years.
Similarly, many businesses in emerging markets – especially smaller ones, which make up the vast majority of enterprises in the developing world – are deeply underserved in software, e-commerce platforms and other technologies. I think companies that are addressing these unmet needs also have a long growth runway ahead.
A second reason to take a sustainable investment approach in emerging markets is that it can help to mitigate risks. Companies that are run sustainably should be less exposed to regulatory sanctions, reputational damage, consumer opposition, talent loss and other threats to their long-term success.
Q How can investors implement a sustainable investment approach in emerging markets?
We think deep-dive research and a selective, positive-inclusion approach remain the keys to investing sustainably in emerging markets.
For one thing, providers of environmental, social and governance (ESG) ratings often do not agree with each other. That makes it difficult to build a portfolio based on their ratings. For another, many developing-world businesses are not covered by the major ratings providers. I think the only way to form a robust investment view is still to do your own research, get to know management teams and travel to meet companies.
On the ground, you get a real sense of the structural transformations taking place. When one of our analysts, Eduardo Gomez, went to Brazil recently, it was clear that a digital payment system called PIX has significantly improved the ease of doing business.
Created by the Brazilian Central Bank in 2020, PIX has been adopted by millions of individuals and businesses in Brazil. From sellers of maté (tea) on the beach to ride-hailing taxi drivers, enterprises of all sizes are now displaying QR codes that let their customers pay instantly via PIX, with minimal fees.
PIX has been truly transformative because Brazil is one of the least-banked countries in the world. The incumbent banks have always tended to focus on wealthier individuals and larger customers. Now, PIX is enabling merchants of all sizes to move beyond cash, bringing them more fully into the financial system. That makes them bankable entities, and future potential customers of a range of financial services, such as loans. For a select group of businesses, particularly challenger financial institutions, their addressable market is now on a much faster growth trajectory. For us, that’s an exciting investment opportunity, regardless of the near-term economic outlook.
General risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Sustainable Strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market. Emerging and Frontier market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
