Emerging markets can offer diversification and stronger growth, but it’s important for investors to take a country-by-country approach.
As an asset class, the emerging markets are 24 countries across Latin America, eastern and southern Europe, Africa and Asia that — often contrary to popular belief — are largely well-run democracies with successful economies and large, growing middle classes.
EMs often deliver higher returns than developed markets, though performance sometimes comes at the cost of higher volatility.
One of the attractors for Australian investors is that emerging markets offer some diversification. The risks they have are different to the risks in developed markets and there are periods when they can outperform developed markets. So for Australian investors who are making an international allocation, having some emerging markets can help diversify some of that risk.
These are also markets that have generally stronger trend growth rates, so the fundamental growth opportunity you’re buying is often stronger in the emerging world than in the developed world.
We believe there is a common misconception that emerging markets countries are dysfunctional, war torn or burdened with significant health or security issues. But they’re generally not that different from us — they just haven’t progressed as far down the path of economic development.
It’s important to understand that while they’re never the perfect investment opportunity, they are usually not excessively risky or chaotic.
Origins of Emerging Markets investing
Emerging markets stocks were once difficult to access and generally ignored by foreign investors.
In the 1980s, a World Bank push to promote the asset class encouraged investment and helped finance development.
Since then, the asset class has undergone significant changes. The history of emerging markets as an asset class is one of booms, slowdowns and recoveries. It’s important to be positioned in individual countries that offer the better opportunities.
For example, the size of China has changed beyond recognition. It was about the size of Poland when it originally came in, and now it’s by far the largest market in the asset class.
There’s also been markets like Argentina that seem to promise a lot but struggle in the longer term.
Greece has been an interesting story — promoted to be a developed market, but subsequently had the crisis in 2011 and came back to us.
When taking a country by country approach, fund managers, including Pendal, will develop a comprehensive understanding of the economic and political conditions of each individual market.
This detailed knowledge allows the team to more confidently navigate the mixed fortunes of emerging markets.
It’s a very technical, consistent approach based on getting a clear-eyed view of what’s happening in the economy, principally through the data releases that come out. Investors usually buy emerging markets for growth, and they buy equities for growth, and so what’s happening in the growth environment is a core consideration.
Right now, the Pendal team sees a number of key emerging markets that have over the last five or seven years had slowdowns in their economies, but we’re now seeing very clear signs of strong acceleration.
Countries like India, Mexico and Indonesia as the stand-out performers, but we remain cautions that past winners like South Korea and Taiwan are facing a slowdown in their key export markets.
And China? We have a neutral position. There clearly is going to be a rebound in the Chinese economy because of post COVID opening and because the most unfriendly policies that the administration was pursuing have eased off.
But without a real estate recovery, it’s hard to see how China can get the economy back to where it was in 2015-16.
Find out more about how Pendal can help investors access a world of opportunity in Emerging Markets
This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426. PFSL is the responsible entity of, and issuer of units in the Pendal Global Emerging Markets Opportunities Fund, ARSN: 159 605 811 (Fund). PFSL has appointed J O Hambro Capital Management Limited to manage the assets of the Fund. A product disclosure statement (PDS) is available for each class in the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com.
The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should consider the relevant PDS and TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. This article is for general information purposes only. You should consider whether or not an investment in the Fund is appropriate for you.
