Emerging markets: Where next?

Emerging market economies had a hard time in 2021, their economies and population suffered from a slow vaccine deployment, and the spread of the Delta variant tempered their recovery. With high levels of volatility and inflation in Europe and the United Estates, some investors see Emerging markets as a refuge. But, what emerging markets are more interesting at the moment? And what sectors within emerging markets could be more relevant? Are investors interested in fixed income opportunities within emerging markets?

We have spoken to three professionals within the asset management industry who are specialised in emerging markets, so we can understand where are the opportunities available at the moment in emerging markets.

What emerging markets are more interesting?

Yerlan Syzdykov, Global Head of Emerging Markets at Amundi says that global growth expectations have been revised lower sharply. The main and partial relief for commodity exporters comes from the commodity boom, alleviating/offsetting the negative impact mentioned so far.

As far as China is concerned, the enforced lockdown is likely to have sent China into a temporary  recession in Q2. However, since April, new Covid-19 cases have fallen and activities have been recovering steadily. He says that base case is for the reopen in China to continue get traction and therefore our H2-2022 China growth outlook is far more constructive.

In his opinion, despite the macro headwinds, they do not view Emerging Markets posing a systemic risk today. Instead selectivity remains paramount. The current geopolitical environment, having negative repercussions on the macro and financial conditions is increasing the likelihood of idiosyncratic crisis in some cases. Case in point being low income countries that are struggling to service their debt or individual vulnerable stories such as Turkey: where we expect a significantly higher risk of a Balance of Payments crisis–particularly as high energy prices have further deteriorated external accounts. 

While the growth outlook is suffering on the domestic demand side via erosion of household purchasing power as well as deterioration of fiscal accounts, there are some notable exceptions. These include countries in the Gulf, commodity exporting Latin America countries, South Africa and few countries in Asia: such as Malaysia and Indonesia, where we see more stable expectations, as opposed to a proper improvement. 

We remain constructive on commodity prices for rest of the year, especially likely EU oil embargo vs Russia would support oil price on the medium term, also China re-opening will boost demand for both oil and industrial metals. Within hard currency sovereign credit, we believe selection is key. Our key overweights are predominantly in Africa and Latin America. We are short exposure in select countries with deteriorating fundamentals as well as countries with tight valuations. 

Paolo Monaco of Equity Research & Portfolio Management team at Eurizon says that at the moment they are overweigth on Indonesia, Thailand, India and China in particular. He says they believe that, after the slowdown, which has beee aggravated by the Covid 0 policy, the real estate collapse and the regulatory issues of the recent months, all the countermeasures so far adopted (both fiscal and monetary) could give a boost to the chinese economy in the second half of 2022.

On the short run he explains that they are worried of a possible global slowdown if not a recession. This could of course be felt importantly by emerging market economies, particularly the most vulnerable.  This is the reason why we are underweight some equity markets of Latin America (Mexico, Chile, Colombia and Peru) and some Emerging european market such as Poland and Hungary.  We are also prudent in South Africa and avoiding Turkey.

He says they prefer the Middle East for its defensive characteristics. Asia should prove to be more resiliant to a scenario of global slowdown. In the long run we prefer market with solid fundamentals and economies with higher and stable growth profile. India is definitely one of them togheter with Indonesia and some of the Middle East countries.

Chad Cleaver, one of the PMs of the Driehaus Emerging Markets Sustainable Equity Fund, says that while India’s equity market has struggled due to commodity price inflation and foreign selling, we believe these factors have created a good entry point into one of the best structural growth markets within EM. India’s economy is transforming through investments in infrastructure and a shift in the workforce into areas such as manufacturing and technology.

He says at the moment they are finding attractive opportunities in private sector banks, which are poised to tap into the growth opportunities in the country, while being well capitalized and maintaining strong asset quality.

Mr. Syzdykovm says that they continue to believe in the commodity supercycle, and view commodities and commodity-related assets (sectors, countries, etc.) as both a valuable source of returns and a hedge against inflation and geopolitics. He points out that they actively explore sovereign/corporate bond areas that could benefit from high energy prices. And in his opinion, hard currency corporate credit remains an attractive avenue to pick-up yield and diversify the portfolio across sectors, issuers, ratings and regions.

They favour relative value plays rather than directional trades, and prefer to be exposed to companies that are producers and exporters of raw materials.

Mr Monaco from his side says that they are prudent in their approach to markets at the moment, beeing overweight consumer staples, and underweight some of the cyclycal sectors such as Materials and Industrials. He says that they are gradually positioning in sectors which have being penalized in the chinese market, especially consumer discretionary, technology and communication services.

In his opinion sound balance sheets, high and stable growth profile, limited regulatory risks and of course reasonable valuations, are among the principal elements for stock picking selection, irrespective of the size of the companies they invest in.  They are trying anyway to identify the long term winner in each sector or industry.

Mr Cleaver, says that renewable energy is an industry that they find compelling against the backdrop of technological improvements and rising global investment in new wind and solar capacity. He continues saying that approximately 75% of the supply chain is based in China, and many companies have scaled up manufacturing capacity and developed new technologies to improve energy efficiency. Russia’s invasion of Ukraine led Europe to develop plans to displace Russian gas within its energy matrix, creating a heightened sense of urgency for the adoption of renewables. China’s recent five-year plan also included a shift toward renewables. These developments have accelerated growth opportunities for supply chain beneficiaries in the industry.

Their strategy invests across the capitalization spectrum and is finding a strong pipeline across small, mid, and large cap securities. Over time, we expect to see strong growth in small and mid cap stocks, which offer high exposure to domestic demand and tend to have less sensitivity to geopolitical and regulatory developments. This feature has helped investors mitigate the risk associated with China’s regulatory crackdown in 2021 and the Russia-Ukraine war.