DAVID SEMPLE: We're still relatively upbeat about the emerging markets (EM) but what people have to understand is that we're looking at a very select part of EM. There are large companies and large sectors in the emerging markets that we don't think have a particularly good outlook right now. However, we believe that we can find some opportunities that are structural growth opportunities that play on what people think they're getting with emerging markets but often don't achieve with many of the more index-driven products.
Declining Growth in China
SEMPLE: China is a bit of an issue with investors. It's clear to us that growth is slowing down in China, and to be frank, this has always been our base case. China can't grow at the level that it's been growing at and there has also been a shift in policy. The reforms that are being undertaken by the current leadership could be very bold and may mean that there's less growth in the shorter term. It does, however, raise optimism in the longer run if the reforms come through in the appropriate manner. That is quite a big ask and there are challenges in this process, but we're optimistic that certain parts of the Chinese economy will do well.
China is a very policy-driven market and the policy is focused on specific areas such as clean air and clean water, and one could get a very interesting outlook in terms of the aspirations of people in China as they get wealthier. Whether they entail education, healthcare, travel, or even social media, all are natural things that have structural growth profiles.
EM Equity Market EPS Growth
SEMPLE: One of the issues in the emerging markets has been the poor translation of economic growth into EPS growth over the last two or three years. There's been a persistent downward revision in earnings and not much earnings growth for the EM index (MSCI Emerging Markets Index) in aggregate over the last three years. I think part of the problem is that as we move into a lower growth environment in emerging markets, it's not going to be lower than developed markets but it's going to be lower than what emerging markets were in the past. We are beginning to see which companies are really well run and which aren't. There are many companies that I would describe as lazy, in the sense that they haven't had to be well run because they have been working in an environment of strong economic growth, which translates into strong top line growth. If you have strong top line growth, it appears that you don't necessarily need to bother as much with sweating costs, balance sheets, and working capital, which is what the good companies do even in good times.
SEMPLE: We are entering into a period of some significant elections in emerging markets, from Indonesia to India, Turkey, and Brazil. Some of them matter more than others. One of the elections that I would point to is the one in India, where I think the market is expecting a change in the leadership of the government with the BJP picking up seats from Congress. This is generally perceived as a positive for the market. The question for us now is how much of that is incorporated in an outperformance for India.
In Indonesia the popular governor of Jakarta, Joko Widodo, is likely to be a candidate for the presidency. I think we could see that as positive in terms of sentiment, but we don't want to overestimate his ability to make things happen in terms of infrastructure, building new roads, and dealing with flooding in Jakarta.
Turkey is another area where elections are definitely going to matter. We've just had the municipal elections in Turkey, which we've seen as a referendum on the ruling AKP. From what we can see so far, it looks as though it effectively will be a one party government again, which in the short term is probably good for that market.
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MSCI Emerging Markets Index: An index created by Morgan Stanley Capital International (MSCI) that is designed to measure equity market performance in global emerging markets.
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