Investors traditionally viewed the investment case for emerging markets through a series of external events, with the asset class a proxy for one’s view of the wider global economy.
But if macro factors have the capacity to determine both the sentiment, and the reality, of emerging market equity performance, how can an investor create a portfolio that is diversified enough to capture the variety of opportunities from the set of economies which are becoming an ever greater part of global GDP.
Dominic Bokor-Ingram, senior portfolio manager at emerging market specialist Fiera Capital, sums this up as: “Emerging markets are less an asset class than a series of events. The macroeconomic environment of the whole world matters much more than in other asset classes, and that means you have be very selective when investing there.”
Two of the themes that tend to dominate the discourse around emerging markets are the relative strength of the dollar and the outlook for commodity prices.
In 2022 Latin American equities were the best-performing sector in the Investment Association funds universe, as commodity prices rose.
Jonathan Toub, fund manager at Aviva Investors, says: “Commodity demand over the longer-term is usually driven by the level of demand from China, it is hard to get away from that. But in terms of areas that are diversified from the wider story, the gulf states are becoming an increasing part of the market.”
Daniel Hurley, emerging market specialist at T Rowe Price, says one major change in recent years has been the capacity for higher commodity prices to negatively impact other emerging markets, notably India and China, which are consumers of commodities.
China is around one-third of the entire emerging markets index, so if commodity prices negatively impact the growth of that country, that has an impact on the rest of the emerging market sector.
Arun Sai, senior multi-asset strategist at Pictet Asset Management, says Brazil as a commodity exporter and China or India as commodity importers perform totally differently from each other depending on where commodity prices are, and this offers investors the opportunity to diversify within emerging markets.
Hurley says the capacity for emerging market economies to benefit from higher commodity prices means: “Investors shouldn’t just focus on Asia when thinking about their exposure. There has started to be a trend in markets of thinking that you can forget the rest, but I think the performance of Latin American equities in 2022 shows they have a role to play.”
Fahad Kamal, chief investment officer at Kleinwort Hambros, says he is generally quite sceptical on the investment case for equities right now but is overweight emerging markets.
His principal reason for having this view is valuation: “Emerging market equities have never traded as cheaply relative to developed markets, except for maybe two occasions in history. For us, the valuation case offsets the negatives. Emerging markets tend to move in long downswings and long upswings.”
