Emerging Markets Equity: Structural Growth at the Front and Center in 2020
David Semple, Portfolio Manager
January 15, 2020
As the quarter (and year) drew to a close, we started to see a move towards resolution of the U.S./China trade debacle, albeit that matters were really getting down to the wire, especially as the final (threatened) set of tariff goods were very consumption-oriented.
Looking at some of the countries in which we invest, in India, there are still no actual signs yet that the economy will pick up—only the hope that it will. There is no doubt that the politics surrounding citizenship reforms were poorly handled and the ensuing mess did not help sentiment. In China, there was less stimulus domestically in the final quarter of the year and the effect of some of the prior stimulus has lagged in its impact. The country continues to face a difficult situation in Hong Kong, albeit that events there have somewhat dropped out of the headlines. In Brazil, there continues to be a deal of political noise, but this remains pretty typical of the country’s politics. President Jair Bolsonaro’s agenda, however, remains market- and business-friendly. Finally, it is probably worth mentioning Turkey. Whilst some of the country’s long-term structural issues have still to be resolved, inflation is down, rates are down and the currency is improving. So, there is a least some “mending” going on.
Growth Powers Emerging Markets Equities Outlook for 2020
The outlook for emerging markets equities is reasonably bright heading into 2020. Some of the geopolitical tail risk has diminished (i.e., global trade tensions, U.S. politics, liquidity), although it has certainly not gone away. We are watching carefully to see if corporates respond to more stable conditions with increased capex and credit demand, thus starting a probably modest economic up-cycle. Monetary and fiscal stimuli are expected to continue across both developed and emerging markets, as global governments have scope to boost domestic demand and supply on their end. We believe that emerging markets economies are on the path to stabilization, partly due to prolonged expansion and shallower recession patterns worldwide.
Going into 2020, we also believe that the U.S. economy will be less “exceptional” and the rest of the world will perform better than the U.S. Unlike in previous year(s), we expect growth to be the main driver of emerging markets equity returns in 2020, therefore pushing quality growth companies with strong fundamentals and solid growth estimates to the front and center in a new decade of economic transformation. We also find emerging markets valuations to be relatively cheap versus developed markets. For example, companies on our focus list are reporting solid numbers and are relatively cheap versus historical estimates or current developed markets valuations for our anticipated operating profitability growth. Their balance sheets are in good shape, generating strong cash flows over a three- to five-year time horizon. With the emphasis on growth to drive returns, we believe that emerging markets equities are well positioned to take advantage of this positive market sentiment and outlook!
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 (EM) countries.
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