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In September, Chinese policy makers announced stimulus measures that brought about the prospect of change for its beleaguered property industry.
Now, early data is beginning to suggest cautious optimism is warranted for a turning point, says our emerging markets team.
September and October are often monumental months in global markets and economics.
Think of the Asian economic crisis in late 1997 and the GFC in 2008.
This year’s start to Spring may not be quite as pivotal, but we’ve nevertheless seen unexpected and drastic changes in Brazil and China, our emerging markets team notes.
In a new article, the EM team outlines good numbers in Brazil’s manufacturing industry, retail sector and equity markets.
While inflation pressure has led to a local rate hike, expectations for lower US rate cuts has eased pressure on EM economies and their currencies.
“Together, these developments have further enhanced our enthusiasm for Brazilian equities,” the team says.
Meanwhile, the team remains confident in its overweight China position as policy changes start to move at a fast clip.
“We consider China’s low inflation, large trade and current account surpluses, earnings growth in parts of the equity market, and attractive equity valuations as reasons to maintain holdings in Chinese equities.”
Read more here
Asian economies are shaking off China’s slowdown and showing signs of renewed vigour, sparked by a wave of tech innovation and a global trend to supply-chain diversification.
That’s the view of Ada Chan, a portfolio manager with Pendal’s emerging markets team and Samir Mehta, who leads Pendal’s Asian shares strategy.
Renewed optimism for Asia is a reminder to avoid the trap of assuming temporary challenges are here to stay, says Samir.
“Headlines about tariffs and geopolitics are all we hear of.
“But each and every company we meet with is reacting in a different manner, adjusting and getting more competitive to deal with these challenges.
“All the company meetings we do and the managers we meet make us reasonably confident that if liquidity conditions get better – which is the potential in the next 12 to 18 months – Asia could be well set for a decent run in terms of economic activity and potentially even stock market performance.”
In this article, Samir and Ada explain how to find investment opportunities in China, Taiwan, Korea and India – read more.
There is a temptation to see China falling into the same kind of balance-sheet recession that Japan experienced after its late 1980s boom, says Pendal’s emerging markets team.
Japan’s Nikkei index has only just this year regained its 1989 peak after a series of so-called “lost decades”.
Given the historical pattern of a decade-long, debt-driven real-estate boom followed by what looks like a debt-deflationary slowdown, do Chinese equities also face a similar “lost decade”?
From beer to luxury products to cosmetics to cars, a clear pattern has emerged among western multinational companies warning about weak Chinese demand.
But a closer look at company results shows a different, more promising pattern, argues Pendal’s team in a new article.
Many Chinese domestic companies are reporting good results and earnings growth. Consensus estimates of future earnings are also being revised up.
There are opportunities to be found in Chinese equities, the team argues. “We remain overweight Chinese equities in the portfolio, with exposure to a highly selective set of stocks.”
Read more here
Emerging equity markets tend to be driven by two broad global drivers:
Each EM country also has its own business and credit cycles to consider, along with local political environments. But these factors are always interacting with the two main global drivers, points out Pendal’s emerging markets team.
Right now, one of the challenges for EM investors is interpreting differing signals from these drivers.
In an article, Pendal’s UK-based Global Emerging Markets Opportunities fund managers say that global demand indicators – such as manufacturing data – look supportive for EMs such as India, Brazil and Indonesia.
Consumer confidence also looks robust in these three markets.
But the other half of the story is the US dollar’s continuing strength and caution about the future direction of US monetary policy.
In this article, the team explains why they remain confident that US dollar softness – when it comes – will create the conditions for strong returns in certain countries.
Pendal’s emerging markets team expects significant interest rate cuts in Mexico and Brazil, increasing their attractiveness to investors.
Although many developed and emerging markets have been cautious on lowering rates, Latin America has embarked on a broad rate-cutting cycle including Mexico last month.
“It’s true that some Latin American central banks that were quick to cut are now turning more cautious — notably Chile and Peru,” says James.
“But we believe Mexico and Brazil should both be able to deliver hundreds of basis points of cuts in policy interest rates over the next 24 months.”
Rates in both countries should come in much lower than consensus expectations in coming quarters, James says.
“This should bring an even more-positive boost to economies, corporate earnings and equity market returns.”
The US election will take the spotlight in November, but emerging markets investors will need to keep tabs on dozens of other national polls this year.
“2024 has the highest concentration of elections, possibly in modern history,” says Paul Wimborne, a senior find manager in Pendal’s emerging markets team.
“There has already been presidential elections in Taiwan and later this year there will be elections in India, Indonesia, South Africa and Mexico.”
Those countries represent 40 per cent of the MSCI Emerging Markets Index by weight and 1.9 billion people.
Investors will need to consider the ramifications of elections with the potential to affect the global macro environment that matters so much to emerging equity markets.
These include Russia in March and the US in November.
While Israel is not schedule for an election, the emergency government formed after the Hamas attacks may not last throughout 2024.
India may have fallen short in the Cricket World Cup this month, but it’s been on a winning run since hosting its previous world cup in 2011.
Since then the country has changed massively, becoming a more attractive location for emerging markets investors, says Paul Wimborne, who co-manages EM investing at Pendal.
“The most significant changes have been in internet connectivity and digital infrastructure.”
The nation’s Digital India program, launched in 2015, has digitised government services and built national internet infrastructure.
The project is now a blueprint for developing nations, Wimborne says.
“India has always had a strong services export economy based on software and services. This is going to kick things along even further.
“We are going to see huge changes in things like healthcare and digital commerce. Small-to-medium enterprises will have much greater ability to sell online.
“India is going to become an even bigger powerhouse.”
The United Arab Emirates was hit badly by Covid, reporting more cases compared to its neighbouring Arabian gulf states.
That caused a drop in tourism, subdued real estate and higher unemployment.
But it’s since made a powerful recovery and undergone structural reforms that make it more attractive to emerging markets investors.
“The significance of the structural reforms has been underestimated,” argues James Syme, a senior PM from Pendal’s EM team.
Foreign nationals can now live and work in the UAE for a decade and buy property there.
Other reforms have developed Abu Dhabi and Dubai into financial centres. In 2022, the region hosted roughly a quarter of all global IPO volume.
“After taking a thorough look at the UAE’s recovering tourism, trade and oil sectors in the context of deep structural reforms, we moved our position to overweight,” says James.
Parts of China’s equity market are showing opportunities at current price levels, says emerging markets portfolio manager James Syme.
James believes the EM equities asset class is dominated by bottom-up investors who, in the aggregate, alternatively underreact and then overreact to top-down developments.
“Sometimes over-reaction can occur to the downside, when groups of stocks within markets sell-off indiscriminately to unjustified levels on top-down concerns.
“We believe that’s happening in parts of the Chinese equity market – and that real opportunities are being presented at these price levels.”
Does that mean Chinese equities are set to outperform the broader emerging market benchmark?
No, he says. “The property sector continues to struggle and the loss of market share in US imports will not easily be regained.”
But there are opportunities, James believes.
Subdued US imports are weighing heavily on Asian economies such as China.
Emerging markets investors should look instead to countries driven by strong domestic demand, argues Pendal portfolio manager James Syme.
James points to the World Bank’s latest economic outlook for east Asia, which highlights weakness in China’s economy and an ongoing slowdown in Asian exports.
The bank forecasts GDP growth decelerating to 4.5 per cent in the region – historically weak growth excluding short-term shocks.
“We do see continued weak growth in China,” says James, pointing to tighter monetary and fiscal policy, intervention in the private sector, the effects of the pandemic and a sagging share of US imports.
Instead, James points to Asian economies such as Indonesia and India, which are driven more by robust domestic demand than exports
“Indonesia and India are our only overweight country positions in east and south Asia,” says James.
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