Embattled emerging markets, which had already been dealing with rising debts from the pandemic, have been further challenged so far in 2022. With $5trn wiped out from 24 nations in the MSCI Emerging Markets Index since its peak in early 2021, Vitali Kalesnik, director of research at Research Affiliates, notes that stocks in these regions “have some of the cheapest valuations of all liquid equity markets,” which “makes them very attractive”. The index has fallen 7.4% since MSCI kicked Russia out of its indices on 9 March (through 27 June), as nations such as Hungary, Poland, the Czech Republic and Turkey suffer from an over-dependence on Russia for energy, food staples and tourism.
A rush in commodities has benefitted emerging markets, which had hit an all-time high in February 2021. Rising precious metals prices have boosted currencies like the Brazilian real, Chilean peso and South African rand even amid a strengthening dollar. Julian Brigden, co-founder of Macro Intelligence 2 Partners, is particularly bullish about the Chilean equity market. Speaking to the Opto Sessions podcast in April, he forecast that the peso could be 30–40% stronger given the country is “extraordinarily copper sensitive”. Commodities are not the biggest driving factor, though, cautions Maria Negrete-Gruson, a portfolio manager on Artisan Partners’ sustainable emerging markets team. “Materials and energy make up 14% of the MSCI Emerging Markets Index,” she tells Opto.
Nonetheless, there’s no sugarcoating the pain. Emerging markets have since been caught up in the broader market pullback, leading many investors to think that this might be yet another false dawn. Negrete-Gruson doesn’t expect this to change any time soon but sees “opportunities in areas such as ecommerce and select areas of Chinese industrials that have been hit hard on valuations but still seem well positioned to deliver on earnings”.
Kevin Carter — founder and CIO of EMQQ Global, an index and advisory firm that launched the Emerging Markets Internet and Ecommerce ETF [EMQQ] — also sees ecommerce as a major trend, as he told Opto Sessions in March. Outside of China, which he says has the most developed online retail market in the world by far, Carter believes there’s higher growth potential in other emerging markets such as India.
While China was for a long time an obvious destination for investors, it is struggling with a weak economy and debt dependency. Investors who might turn away from Chinese manufacturing could instead steer into Vietnam, Bangladesh or Indonesia, all of which have growing manufacturing sectors. Caroline Cai, portfolio manager at Pzena Investment, tells Opto that she has been increasing the firm’s exposure to the Taiwanese manufacturing sector, which “remains attractively valued due, in part, to Chinese contagion and associated end market demand pressures, which we view as transitory”.
“Longer term, we expect Taiwan’s low cost of production, manufacturing prowess and dominant position in the increasingly vital semiconductor industry to drive growth for our holdings — namely Hon Hai [2317.TW], Lite-On [2301.TW] and TSMC [2330.TW], among others,” she added.
A post-pandemic slowdown in globalisation may also play a part, with economies seeking out the reliability of local partners and more targeted bilateral or regional trade agreements. India’s agreement with the UAE is a case in point, and its ever-improving technology and digital infrastructure may allow it to take a foothold on the world stage.
Over the past 20 years, emerging markets, particularly the technology, financial and healthcare sectors, have contributed almost two-thirds of the world’s GDP growth. With global events, both social and political, causing a multitude of headwinds, fund managers see tactical entry points for long-term investors.