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  • Emerging Markets Equity

    Q&A with David Semple: Emerging Markets Opportunities and Concerns

    David Semple, Portfolio Manager
    May 02, 2018
     

    As the second quarter of 2018 progresses, we spoke with Portfolio Manager David Semple to get his views on what to watch in emerging markets equities.

    VanEck: Emerging markets have outpaced their developed counterparts in recent memory. With that in mind, what are your expectations for the remainder of this year and beyond in the emerging markets?

    David Semple: Fundamentals on the ground in emerging markets are looking pretty good. That’s not to say there aren’t concerns. For instance, trade, tariffs, and protectionism have been rearing their ugly heads over the last few weeks, and we are keeping an eye on how these issues may develop. It would be disappointing if things progressed in a negative direction, but it’s not inconceivable. Clearly there’s some concern globally that rates in the developed markets might increase too much, too quickly and engender a bit of a slowdown. However, generally speaking, emerging markets are fairly early in their business cycles as opposed to a maturing developed market. Overall we believe things look positive.

    VanEck: Some of the overall success recently in the emerging markets was a currency story. What’s your outlook there?

    David Semple: I don’t pretend to be a currency expert. It’s incredibly difficult to predict currency swings on a day-to-day, week-to-week, or even a month-to-month basis. However, when looking at the U.S. dollar, I am concerned about twin deficits - current account and fiscal deficits. Typically as these expand, it tends to be dollar negative. There does not appear to be an egregious mispricing of currencies, which does not really matter in the short-term.

    VanEck: Where do you see opportunities within emerging markets?

    David Semple: Last year there were certainly some concerns on the narrow leadership within emerging markets, meaning a few stocks really leading the market forward. This year I think it will be broader-based. Some of the leaders in the emerging markets last year, such as Alibaba, Tencent, and JD.com, were the emerging markets’ equivalent of the FANG stocks (Facebook, Amazon, Netflix, and Alphabet's Google). We own some of those leaders in our portfolio and in my opinion, the outlook is still positive for companies like Tencent and Alibaba. The business model for these types of companies do morph over time and that may give people some anxiety, but we see a very strong structural growth story in those companies.

    I think that there are also other areas to be excited about. One of the sectors we like, very broadly speaking, is financials at this stage in the cycle. When interest rates tick up, the financial sector tends to respond positively. These companies have better margins as rates increase, and their credit costs at this stage in the cycle tend to be less. It’s a good place to be, especially as asset growth may be picking up. It’s been a one-way street in terms of credit to GDP actually decelerating in emerging markets. Perhaps the animal spirits are back and companies will become more aggressive and begin borrowing more for CapEx or even for mergers and acquisitions. This behavior is not really typical of emerging markets companies overall, but at least as investors, we are seeing that strong structural growth story developing.

    VanEck: David, thanks so much for taking the time to share your thoughts.

    David Semple: You’re welcome. Thank you.