THE CASE FOR EMERGING MARKETS
THE FALLOUT from the US-China trade war and other uncertainties continues to weigh on investor sentiment for emerging markets.
But we don’t think the trade spat or some other issues, which we perceive to be short-term in nature, should cloud investors’ long-term view of the asset class.
We continue to see evidence of some positive emerging-market fundamentals that supports our medium- to long-term optimism.
Here are three considerations we think investors are missing when it comes to emerging markets:
1. Crisis-level valuations aren’t reflecting continued underlying resilience in
emerging markets. Geopolitical tensions between the US and China have contributed to a decline in emerging-market stocks, driving valuations to near-crisis levels. However, for us that brings attractive potential opportunities, because we don’t see most emerging-market economies in crisis situations. We think the pull-back we’ve seen in emerging-market equities in recent months presents some attractive medium- to long-term opportunities.
Although economic growth overall was perhaps not as strong as had been expected at the start of the year, in 2018 emerging markets still outpaced developed markets. This trend is expected to continue in 2019, with the International Monetary Fund (IMF) forecasting 2019 gross domestic product (GDP) growth in emerging markets at
4.5 percent versus 2 percent in developed markets. 2. The corporate environment looks supportive. Despite weaker currencies in emerging markets, corporate earnings growth in US dollar terms was positive in 2018 and looks sustainable to us, so we think cheaper valuations could attract long-term, value-oriented investors to companies that are trading at a discount.
Against this brighter backdrop, we’ve seen an improvement in corporate governance, with better transparency between company stakeholders and decision-makers. We think this creates a supportive environment for shareholders.
3. Consumerism and technology are the engine of emerging-market growth. Although we saw some headwinds for emerging markets last year, in our view they obscured the bigger picture – some emerging-market companies are now world leaders in the areas of financials, technology and in the production of many consumer goods.
Emerging markets in many cases have been able to adopt new technologies at a fast rate because there are no legacy systems that need to be replaced or integrated first.
We are confident that technology will remain a primary driver in emerging markets, whether manifested through world-leading semiconductor manufacturing, e-commerce or other areas.
Consumerism in emerging markets should help drive growth in many regions. Growing middle-class populations and increasing affluence – the premiumisation of the market – continue to spur demand for highend products available in emerging markets. In our view, companies with superior products should see sustainable growth in the years to come.