More than the US, Europe
Investors can find a range of interesting opportunities in countries such as India, Indonesia, Brazil and South Korea, writes Pedro van Gaalen
As offshore investors navigate a dynamic global macroeconomic and political landscape, growth challenges and structural issues suggest developed markets will offer fewer opportunities for strong returns.
While the US economy is roaring back to life, elevated valuations mean expected returns from US equities are low and forward-looking market returns are expected to moderate over the medium term. Regions such as the UK and Japan are entering a recession, and the European Commission cut its growth and inflation forecasts for the eurozone in 2024 as geopolitical tensions increase uncertainty.
In contrast, the World Economic Outlook Update, released in January 2024, predicts that emerging markets and developing economies will experience stable growth through 2024 and 2025, albeit with regional differences.
“Emerging markets currently offer a range of interesting opportunities. We think investors can optimise their expected risk-adjusted returns by focusing on individual markets or assets,” says Michael Bolliger, chief investment officer for emerging markets at UBS Global Wealth Management.
China, in particular, is a
popular option. Amid the widespread loss of confidence among domestic and global investors in the Chinese growth story, Sandile Malinga, co-head of multi-asset at
M&G Investments, believes Chinese equities represent an excellent opportunity from a top-down aggregate equity market perspective and for disciplined, bottom-up stock pickers to find great companies at cheap valuations in the first quarter.
“We remain constructive on China following the recent sharp fall in equity prices,” he says.
From a bottom-up perspective, Malinga believes investors are overlooking the longer-term prospects for companies that have powerful structural tailwinds behind them and an improving approach to delivering returns to shareholders, such as the rapidly increasing pace of share buybacks and more disciplined corporate costcutting.
“In addition, China is well positioned for growth against the backdrop of active fiscal and monetary policy stimulus, deflation, easing policy restrictions, a persistent current account surplus and the high levels of savings they are known for. At the same time, the yuan is relatively weak. So, while demand from the West is currently low, China will be very competitive when it picks up.”
Sean Neethling, head of investments at Morningstar South Africa, agrees that Chinese equities are cheap but cautions that the market comes with a range of potential outcomes and fundamental risks around government policy that could affect the investment thesis.
“The equity market has derated significantly but could reward long-term investors as the leading Chinese tech companies have significant market share and captive business models. These companies are probably lagging their US peers in generative AI but, at current valuations, even a small shift in sentiment could unlock significant value.”
Despite the stress points in parts of the Chinese economy, Malinga highlights additional areas of structural growth, particularly industries tied to the energy transition.
“Expectations suggest renewable electricity generation from wind and solar in China will increase sevenfold between 2020 and 2060.”
At an individual stock level, M&G Investments is looking beyond the obvious direct beneficiaries of this structural trend to identify opportunities.
“These include companies in the renewable supply chain that enjoy high barriers to entry, either through technology or regulation; commodity-based producers that either have scale or vertical integration, or both, giving them a structurally competitive cost advantage; or tangential beneficiaries of the energy transition, like shipping and shipbuilders.”
Outside China, Neethling believes Brazil and South Korea offer potential for above-fair returns.
“Brazilian equities have delivered good returns over the past year, but resource companies such as Vale and Petrobras and some domestic banks continue to offer upside. The equity market in South Korea is exposed to the semiconductor thesis, with leading companies like Samsung comprising a large part of the broader market.”
Bolliger also identifies equities in India and
Indonesia as preferred options based on favourable growth prospects.
“India is widely recognised as the world’s fastestgrowing major economy … and macro conditions remain solid despite the potential for volatility in the lead-up to the elections in April.”
Strong macro and fundamental conditions also support Indonesian equities, particularly its financial sector.
“We recommend investors focus on domestically orientated sectors such as consumer, real estate, banks, and select internet names.”
In fixed income, Bolliger believes investors can still lock in elevated yields. “We prefer duration risk over credit risk and advise our clients to focus on quality when investing in individual bonds.”
He adds that the Brazilian real and Mexican peso offer attractive interest rates for foreign exchange investors.