Emerging Markets: Which countries are burning brightly as energy prices climb

Rising oil and gas prices mean boom times for emerging market energy exporters such as Brazil, Mexico and Russia, says Pendal EM manager JAMES SYME

• Rising oil prices are lifting energy exporters
• Boom times for countries that sell energy
• Brazil, Mexico and Russia the picks

GLOBAL equity investors should look to Brazil, South Africa and Russia in 2022 as rising oil and gas prices deliver widespread economic growth to emerging market energy exporters, says Pendal’s James Syme.

Shifting attention to commodity exporters would be a change for many global investors who have been enamoured with China’s internet sector and the big semi-conductor stocks in recent years.

Syme — who co-manages Pendal Global Emerging Markets Opportunities Fund — agrees that has been the right approach for the past decade.

“But the Chinese economy is not particularly strong at the moment, and while it’s been a long time coming back for some of these other emerging markets, everything is starting to look good,” he says.

The oil price at around US$90 a barrel is at its highest levels since 2014 amid surging demand, while European near-term gas futures — which normally trade between EUR 10-20/MWh — recently spiked above EUR 180.

Syme says it’s not surprising that energy prices are rising as a long period of low investment in new capacity is followed by a sudden post-Covid resurgence in demand.

Western Europe has been reducing domestic gas production for environmental reasons, lifting its reliance on Russian gas. Germany has been steadily decommissioning nuclear power, including shutting three of its last six nuclear plants on December 31.

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And recent weather patterns have also played a role. Over the past few years Europe has had unseasonably cold winters and warmer than usual summers — which both lift energy use — while relatively windless autumns have capped power production at wind plants.

At the same time, Russian domestic demand for gas is rising and Russia’s gas exports to other countries, including China, have been increasing.

‘Boom times’

“Rising energy prices and the resulting inflationary push are going to be an economic and political problem for energy consuming nations,” says Syme.

“But for the countries that sell energy, this is fantastic.

“It’s just boom times.”

Syme says the boom is not limited to energy, with many other agricultural and mining commodities also seeing price rises, which benefit Brazil and Russia, and other commodity exporters like South Africa.

“And we haven’t really seen the reaction in terms of what that might mean for domestic stocks or currencies that we would expect to see.

“That’s why we continue to have positive view towards some of these markets and think they’re overlooked.”

Higher commodity prices flow directly through to economic growth in exporting nations.

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More export earnings mean companies can lift capital investment, hire more staff and pay higher wages, boosting consumption. Higher exports also improve a country’s current account balance and support its currency.

The resulting growth flows through to tax revenue, allowing governments to lift spending or cut taxes.

“It’s positive across the board,” says Syme.

Natural gas is also benefiting from its potential role as a bridge in the transition to lower carbon emissions.

“Both in terms of production and consumption, the carbon emissions per unit of energy for natural gas are lower than oil and much, much lower than coal.

“Notwithstanding the geopolitics, Europe could significantly reduce its carbon emissions if it switched power generation from coal to natural gas.”

So where to focus investment attention?

“We think this is a good time to own Latin America, where we prefer Brazil and Mexico” says Syme.

“We also think it’s a good time own South Africa and Russia.”

About James Syme and Pendal Global Emerging Markets Opportunities Fund

James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.

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.

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