Skip directly to Accessibility Notice
  • Emerging Markets Equity

    Domestic Demand Insulates Impact of Global Uncertainty

    David Semple, Portfolio Manager
    October 18, 2019
     

    The third quarter was slightly more challenging for emerging markets, driven in part by the twists and turns in global trade rhetoric. In addition, we continued to see revisions downwards in global growth balanced by monetary policy movements, i.e. reductions in rates, around the globe.

    While expectations for economic growth in China have been declining, there are signs that some of the stimulus, particularly the infrastructure/fixed asset investment-type of stimulus, is starting to gain a little traction. The services sector, however, continues to be relatively robust in our view. Markit’s purchasing managers’ index (PMI) showed improvement over the quarter with, notably, new orders having picked up. Meanwhile, though, imports of goods from the U.S. continued to be weak, in part driven by a buyers’ strike on the agricultural side, these buyers being SOEs. At the very end of the quarter, obviously, there was also some concern about mooted restrictions on Chinese companies listing in the U.S., as well as pressure to exclude them from globally-used indices.

    In India there has been weaker than expected growth, in part because of a continuing credit crunch linked, among other things, with concerns around the creditworthiness of counterparties, including some non-bank financials and property companies. The extension of credit to them has dried up, which creates, in and of itself, an exacerbated credit crunch, with fear only making the situation worse.

    However, in an attempt to get ahead of the curve, the Indian government, which has been criticized in the past for doing too little, made a bold tax move to reduce corporate tax rates substantially. The question is whether this effectively translates into increased demand. There is some skepticism and thought that any cash saved may simply go into the corporate coffer, and that spending does not increase—instead, debt gets paid back, balance sheets get better, but there is no immediate impact on demand.

    While we continue to see uneven, but forward, progress in Brazil in terms of President Jair Bolsonaro’s policy prescription, it remains broadly market-positive. Entitlement reform, in a relatively intact form, appears to be moving through the legislative process. Attention turns now to other areas like privatization.

    Turkey continues to be a surprise for some this year. Inflation is definitely coming down, interest rates are coming down and the situation appears to be normalizing, although it is still somewhat fragile.

    Emerging Markets Equity Outlook

    We currently see the outlook as uncertain. The tug of war between economic growth and monetary policy globally and the policy direction from the U.S. in particular are concerns. We believe the overall move to cap out globalization is not positive for emerging markets. While China’s economic growth is likely to move downwards, this is not something either unpredicted or deeply concerning for the VanEck Emerging Markets Fund’s very idiosyncratic, domestic demand-driven, individual stocks.

    While balance sheets continue to have higher cash levels and cash flows continue to be very strong, the issue is what companies do with these flows. Valuations are modestly cheap to very cheap, depending upon where you look. This is particularly the case for small caps, which may continue to underperform. Commensurately we believe their valuations can be quite compelling.

    Since we want the whole opportunity set to be available, it remains market-cap agnostic. In our view, great companies are available at very good valuations that continue to address nascent areas of demand in emerging markets that, thankfully, are not predicated upon global trade.

    Download Commentary PDF with Fund specific information and performance.

    For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 9/30/19, please click on this PDF. Please note that these are not recommendations to buy or sell any security.

    DISCLOSURE

    PEG ratio is the ratio of the forward price to earnings divided by growth in the following year. Return on equities is net income divided by total equity. Return on invested capital is the ratio of net income less dividend paid over the firm’s total capital.

    All indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. The Morgan Stanley Capital International (MSCI) Emerging Markets Index captures large- and mid-cap representation across 26 emerging markets (EM) countries. The MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across 26 emerging markets countries.

    The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2019 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

    Diversification does not assure a profit or prevent against a loss.

    Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results; current data may differ from data quoted. Current market conditions may not continue. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

    You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to the risks associated with its investments in Chinese issuers, direct investments, emerging markets securities which tends to be more volatile and less liquid than securities traded in developed countries, foreign currency transactions, foreign securities, other investment companies, Stock Connect, management, market, operational, sectors and small- and medium-capitalization companies risks. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability.

    Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus. Investing involves risk, including possible loss of principal. An investor should consider the Fund’s investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.