A new chapter for emerging markets?

As emerging markets (EMs) rapidly resume economic activity, more measured stimulus actions and early tapering contrast with developed markets (DMs). With compelling valuations that historically have been highly supportive, this creates the opportunity for EMs to deliver more sustainable returns.

Sep 2, 2021

11 Minutes

Archie Hart
As emerging markets (EMs) rapidly resume economic activity, more measured stimulus actions and early tapering contrast with developed markets (DMs). With compelling valuations that historically have been highly supportive, this creates the opportunity for EMs to deliver more sustainable returns.

The fast view:

  • After a ten-year relative bear market, we are at the point of maximum pain for EM. The outlook could look brighter in 12 to 18 months as the vaccine roll out gathers pace.
  • EMs are experiencing a rapid resumption of economic activity. Combined with EM central bankers tapering policy support, this creates an opportunity for these markets to carve out more sustainable returns than in developed markets (DM).
  • EM companies are in much stronger strategic and financial positions than in the past and are run more by entrepreneurs and professional managers. Technology accounts for a larger proportion of the universe, while state-owned and natural resources companies have shrunk.
  • Current valuations are compelling and historically have been highly supportive for the asset class, with a significant catch up opportunity relative to DM.
  • The global roll-out of 5G, remote working driving cloud investment, the renewable energy transition and the acceleration of decarbonisation are all trends that we believe will drive the long-term potential of EM companies. Our 4Factor approach aims to uncover these to deliver long-term alpha for our clients.

Blood in the streets

 
The time to buy is when there’s blood in the streets...
Baron Nathan Rothschild (1777 - 1836)

This is one of the most famous quotes in finance, yet the less familiar and rather more uncomfortable rest of this refrain is: “… even if it is your own”. As EM investors, many of us will currently identify more closely with the latter sentiment – and there may be more volatility to come before markets settle. However, as we are now seeing words like “uninvestable” applied to parts of the asset class, we think it is worth revisiting the outlook for EMs.

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Authored by

Archie Hart
Portfolio Manager, Emerging Markets Equity

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