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Emerging Markets give us clues to the strength of the global economy

A monthly insight from James Syme, Paul Wimborne and Ada Chan (pictured above), co-managers of Pendal’s Global Emerging Markets Opportunities Fund

WHICH emerging markets look good right now? The clues are in the latest global manufacturing data.

MANY emerging markets display a high sensitivity to global risk appetite — which means the asset class is often regarded as a barometer of investor sentiment.

This can overlook the substantial exposure of some EMs to the strength of the global economy, and the visibility into aggregate demand that these markets can provide.

We believe recent economic data from some of these countries shows very concerning signs.

South Korea and Taiwan

The first and most important countries to consider are the two big East Asian export economies of South Korea and Taiwan.

As exporters of electronic goods, vehicles, and chemicals — as well as providers of airborne and seaborne freight services — these two countries are highly sensitive to the global economic cycle.

(As investment-grade borrowers with large, sustained current account surpluses they have much less sensitivity to risk appetite).

The single most disturbing data point is Taiwan’s July PMI print of 44.6, which suggests a rapid deterioration in business expectations. (Figures above 50 indicate positive expectations; below 50 is negative).

Meanwhile, South Korean manufacturing PMI for July was 49.8 — the lowest since 2020.

South Korean earnings expectations have been drifting lower since they peaked in September 2021, and Taiwanese earnings expectations may also now be declining.

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Pendal Global Emerging Markets Opportunities Fund

Central Europe

Things look worse in the European export economies of Central Europe.

Poland shows signs of an accelerating slowdown with manufacturing PMI at 42.1 in July — fully 10 points lower than April.

There is a similar story in the Czech Republic with July PMI down to 46.8 and consumer and business confidence dipping lower.

These results are not a surprise, given collapsing business expectations in the regional heavyweight economy of Germany. But they add to a troubling picture of global demand.


The third major cyclical exporter is Mexico.

Mexico’s business survey data is complicated, with two separate time series. 

For July the Mexican manufacturing and non-manufacturing PMI surveys were both 52.2 — showing expansion.

But the S&P manufacturing PMI survey came in at 48.5, indicating contraction.

Given the much better net energy trade position of North America compared to Europe and Asia, it may be that Mexico fares much better — and we remain positive on the market.

South Africa

Another market which we are positive on — but where survey data has weakened recently — is South Africa.

There the July manufacturing PMI dropped to 47.6, even if vehicle sales and credit growth remain robust.

We continue to think that very strong commodity exports will support aggregate demand in South Africa. But economic data there will need careful monitoring.

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Finding EM opportunities

We consistently express the view that opportunity within  emerging markets is more reliable than the opportunity of the asset class as a whole. In other words there are opportunities in a select handful of EM countries.

There are always economies and markets in upswings. The current environment is no different.

The same commodity export story that is supporting Mexico and South Africa is coming through very strongly elsewhere.

In Brazil the services PMI for July reached the incredibly strong level of 60.8 — a new high. This indicates a full-blown domestic demand boom is underway.

Brazilian earnings estimates have also been rising as strong corporate results come through.

Indonesian GDP growth is expected to exceed 5%, with the July manufacturing PMI at 51.3 and consumer confidence very strong.

Finally in the Gulf, high oil prices are driving intense economic upswings. July PMI survey data for the UAE (one of our preferred markets) was 55.4, while in neighbouring Saudi Arabia it reached 56.3, with Saudi GDP growth for Q2 of 11.8% YoY.

Higher commodity prices act as drags on most global economies, while the strong dollar and higher interest rates are further headwinds.

Right now many commodity economies are experiencing strong growth that’s hard to find anywhere else in the world. We believe this will attract increased interest from global investors.

We remain overweight Mexico, Brazil, South Africa, Indonesia and the UAE.

About Pendal Global Emerging Markets Opportunities Fund

James Symes, Paul Wimborne and Ada Chan are senior portfolio managers and co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at August 18, 2022. PFSL is the responsible entity and issuer of units in the Pendal Global Emerging Markets Opportunities Fund (Fund) ARSN: 159 605 811. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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