David Semple, Portfolio Manager, Emerging Markets Equity Strategy
October 12, 2020
Emerging markets are in the process of economic healing despite the uneven impact of COVID-19. Lower rates and higher fiscal spend have created a significant rebound, but at what cost? We strive to isolate the truly exceptional, structural growth companies from the noise and market volatility of ongoing macro events. Additionally, it is worth pointing out that risk aversion has disproportionately affected small- and mid-cap stocks in emerging markets. As markets normalize, we believe it is reasonable to expect relative outperformance from these smaller stocks. As a “true” all capitalization strategy, these changes in sentiment can materially affect the relative performance of our portfolio.
As the third quarter unfolded, so did the ongoing rebound of emerging markets economies. Easing of virus restrictions, coupled with supportive emerging markets government policies, boosted growth across emerging markets. Indeed, emerging markets governments around the world continued offering fiscal stimuli, including discretionary easing and loan guarantees. Additionally, our expectation is that core emerging markets central banks will maintain their commitments to keep monetary policy accommodative well into 2021.
China, in particular, has been well positioned for economic recovery in the third quarter and continues to move full steam ahead with gains in investment, industrial production and services activity. Although the country was impacted by the virus first, it took timely and decisive steps to contain its spread and further monitor it through extensive testing, diligent contact tracing and ongoing follow-up. Ultimately, China’s economy benefited from being less dependent on sectors and industries affected by COVID-19, such as international travel and tourism, and more dependent on its export activity, primarily driven by the country’s significant market share in sectors like healthcare and technology. China has achieved a better economic outcome compared to many other emerging and developed market countries, despite the fact that its overall stimuli has been relatively restrained.
With regards to EM Asia (ex-China), this group is on its way to economic recovery as well. However, COVID-19’s impact is highly divergent across the region. Virus control measures have been lifted for the most part, but the situation remains problematic in some countries. For example, India, Indonesia and the Philippines continue to face increased rates of COVID-19. Domestic activity and regional trade picked up during the quarter, whereas services activity remained well below normal levels.
Some countries in Latin America have also struggled to control the virus, and unfortunately tend to have a smaller amount of “wiggle room” to address these challenges.
Emerging Markets Equity Outlook: Looking to a Strong Finish to 2020
Clearly, we are in extraordinary times. We expect a bumpy first half of 4Q 2020, primarily driven by uncertainty surrounding vaccine news flows, the upcoming U.S. election and somewhat negative investor sentiment towards emerging markets. But, we expect a stronger finish to the year and a more optimistic one year outlook, once vaccines are available, the U.S. election is over and investors feel more confident in the outlook for emerging markets. A key driver of our outlook for the end of 2020 and beyond is an expectation of global growth recovery, boosted by a timely introduction of a COVID-19 vaccine and its distribution schedule.
The consequences of the global pandemic juxtaposed with truly unprecedented monetary and fiscal stimuli will be with us for many years to come. Emerging markets have traditionally underperformed in a risky environment, but in general, we believe the behavior of the asset class has not been as bad as many might have predicted. A large part of the negative outcome in the first stages of the pandemic was generated by the abnormal strength of the U.S. dollar, driven by a global “shortage” of dollars. Aggressive central bank action has “normalized” the situation, and we continue to have a reasonable hope for U.S. dollar stability (or, dare we say weakness) in the coming quarters. Whilst it may not matter in the shorter term, we think emerging markets currencies are cheap, particularly versus the U.S. dollar.
Investing in emerging markets is for the long haul. Whilst we can’t say exactly how all businesses will recover, we can say, with conviction, that the Fund is well positioned for the future of emerging markets.
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 MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets countries. The MSCI Emerging Markets Investable Market Index (IMI) is a free float adjusted market capitalization index that is designed to capture large-, mid-and small-cap representation across emerging markets countries.
MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across emerging markets (EM) countries. The index covers approximately 99% of the free float-adjusted market capitalization in each country.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities mentioned herein. 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.
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 market 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.
Portfolio Manager, Emerging Markets Equity Strategy
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at email@example.com for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Securities Corporation, Distributor 666 Third Avenue New York, NY 10017800.826.2333