Views on outlook, regional exposures and company engagement
Earlier this autumn, Tell Media Group, in cooperation with Franklin Templeton, GAM Investments and Janus Henderson Investors, invited some Norwegian investors to discuss emerging market equities.
The discussion started with Niklas Tell asking the participants about the general macro view of emerging markets in the coming 12 months and whether now the time to increase allocations to emerging market equities.
HÅKON KAVLI: “Our research is not about timing the market but if we look at the long-term expected returns, we see more potential in emerging markets compared to developed markets. If we look broadly on what has happened, we see that earnings growth in developed markets can mostly be explained by expanding margins thanks to lower interest rates and lower tax rates. Now, emerging markets have disappointed in the last 10 years but we don’t think that developed markets will have the same tailwind in the next 10 years. We therefore see that emerging markets provide excellent diversification away from these systematic headwinds that developed markets will face going forward. Emerging markets are also benefitting from lower valuations.”
FREDRIK WILANDER: “If we talk about our clients, I would say that many are still a bit hesitant when it comes to emerging markets. Also, we don’t have any short-term tactical views on regions or sectors and we let our global managers handle that allocation. However, as Håkon mentioned, there has been a lot of research recently on the one-off impact from lower interest rates and taxes on earnings growth in the developed world -– for example from the Fed – and I would agree that earnings growth will probably be higher in emerging markets going forward. Also, the market capitalisation of equity markets in emerging markets may grow quicker that in developed markets, but that may be because new companies get listed and not necessarily because existing ones are outperforming. If that’s how the market grows, it’s not certain it will translate to high investor returns.”
ANDREW NESS: “As we look at the asset class, it’s clear that it’s under-owned, under-valued and under-appreciated. Some are subjective views and some are objective facts. If you look at ownership, I think it’s fair to say that very few asset owners are overweight emerging markets. Institutional ownership is very low also in a historical context and valuations are low compared to developed markets. I also think it’s important to stress that this is a different asset class today compared to what we had some 10 or 20 years ago. Today, these markets have less leverage in the system compared to developed world – and that’s across households, companies and governments. And the banking systems are much more robust compared to what we used to see historically. I would say this is an interesting time for allocators because I don’t think the asset class deserves to be as underweight as it is.”
TIM LOVE: “I think this is the most misunderstood asset class out there. People’s perception is so far from reality when it comes to what an emerging market is today. Most would actually be excluded if we use the old GDP per capita framework and if we look at companies, it’s very much high value add in key sectors such as robotics, EV and high-end consultancy. Also, eight of the 10 biggest markets are investment grade, so perception is not in touch with reality today. I’m confident that we will have a classic melt-up just like we saw in 2004 – 2008 so a tremendous opportunity.”
NIKLAS TELL: SO WHY ARE INVESTORS HESITATING?
DANIEL GRAÑA: “Nvidia, Meta and Apple provide a valid explanation for why investors are not looking outside the US for opportunities. However, that’s a list that keeps shrinking. If you stripped out the 40 most successful companies from the S&P500 and just looked at the S&P460 over the last 10 years, the performance is in line with emerging markets. I also agree with the previous comments that emerging markets are different today compared to what they used to be. They are much more robust today. I also think that we’ve been so used to always talking about the risks and how we manage different risks that we haven’t spoken enough about the opportunities. Previously, emerging markets were all about outsourcing and convergence. Now there’s a third pillar of growth and that’s innovation. This is not about emerging market companies producing widgets for the global supply chain – it’s emerging market companies solving for emerging market problems. One example is Mexico where two thirds of the population don’t have a bank account. This is now being solved with mobile banking. Another example is the poor access to health services in India, which is solved with tele-medicine. This highlights the opportunities outside big state-owned companies and outside the big tech names that are having an impact. However, we may need US equities to be less attractive than they’ve been for the past 10 years for investors to look elsewhere and realise that there’s more to emerging markets than what they may have been aware of.”
TIM LOVE: “Another example of this development is in India where more people have been added to the banking system over the last five years than all the people who bank in Europe. They’ve gone out to the villages and created ID cards for everyone and connected this to a bank card. The implications for this is of course huge as we now are bringing people onto a system that will facilitate tax revenues as well as trade.”
FREDRIK WILANDER: “Over the last couple of years, it’s not only emerging markets versus large US tech companies – it’s everything in the equity market versus large US tech companies. We hear this similar story regardless whether we talk to a European mid-cap manager or an emerging market manager, so it’s not only emerging markets where there’s a pent up potential – it’s basically everything outside US large cap growth.”
TIM LOVE: “The question then is where you should be when things change and in my opinion, it needs to be emerging markets considering the fundamentals. But investors have been focusing on the dollar and it became a self-fulfilling spiral and today the dollar is at a 16 year high. We might ask why emerging markets haven’t fallen off a cliff with the dollar at this level.”
ANDREW NESS: “We had this conversation about Indonesia just the other day. If you went back five years and said that the US would rise interest rates by 500 points and that Chinese growth will half and asked what happens to Indonesia in such a scenario, it would be an absolute car crash based on history. But it’s a very different market today. It’s not part of the fragile five. Another important development has been the emergence of local investors. That didn’t exist when we started. Now there are local institutional investors so it’s not as volatile today as it used to be.”
… continued … the roundtable discussion was originally published in issue 06, 2023 of Nordic Fund Selection Journal and a PDF of the complete story can be found here.
- FREDRIK WILANDER, Research director, manager selection at Grieg Investor
- HÅKON KAVLI, Portfolio manager, responsible for asset allocation at Reitan Kapital
- KARSTEN SOLBERG, Senior fund analyst at Storebrand Asset Management
- ANDREW NESS, Portfolio manager, emerging markets equities at Franklin Templeton
- DANIEL GRAÑA, Portfolio manager, emerging markets equities at Janus Henderson Investors
- TIM LOVE, Investment director – emerging markets equities at GAM Investments