Emerging markets overall felt a dose of optimism in August amid hopes for a COVID-19 vaccine, continued easy monetary policy globally and improving economic data pointing toward recovery. Our emerging markets equity team breaks down the key trends, news and events it has an eye on, and shares its latest market outlook.

Three Things We’re Thinking About Today

  1. A trend witnessed in several countries globally, the daily number of COVID-19 cases in India started to increase in late-August as the country continued to ease quarantine restrictions and economic activity began to gradually normalize. A silver lining is that these countries—including India—have not seen a corresponding jump in mortalities, reflecting improved treatments and wider testing revealing asymptomatic cases. While this may raise uncertainty on the pace of economic recovery, government stimulus should filter into the real economy gradually, supporting a recovery in due course. Indian equity markets continue to trade at a discount to long-term averages, and we believe long-term reforms and expectations of faster earnings growth could support a re-rating. Importantly, while the government is working on reviving growth, the current challenging macro environment provides opportunities for stronger companies to gain market share at the expense of weaker ones. The macro picture can also fail to capture the disruption in business models, leading to shifts in the profit pool at the corporate level. For example, stronger private-sector banks have increased their lead at the expense of weaker public-sector banks or non-financial banking companies. We believe this factor, combined with our positive outlook on India in the long term (underpinned by several structural growth drivers), supports the case for investing in Indian equities.
  1. Although US-China tensions heightened in August following US President Donald Trump’s decision to ban Chinese apps TikTok and WeChat in the United States, sanctions on Huawei, export controls and the South China dispute, commitment by American and Chinese officials to ensure the trade deal remains on track eased investor concerns that worsening relations could lead to the end of the agreement. While we expect US-China relations to remain volatile, we remain positive on China’s longer-term outlook as the country continues to emerge from the COVID-19 crisis with positive growth in gross domestic product (GDP) in the second quarter, raising expectations for positive growth for the year as a whole. Although domestic consumption continues to lag (although improving), other economic indicators such as industrial production and manufacturing have returned to pre-COVID-19 levels. Additional characteristics that favor China include continued domestic reforms, technological advancement, rapid digitalization, a huge consumer market and the availability of fiscal and monetary tools to help weather external shocks.
  1. In our view, Russia is in an enviable position when looking at a number of fundamental factors; it has little sovereign debt, a current-account surplus and considerable foreign exchange reserves. While oil—an old economy sector—is a major contributor to Russia’s economy, we have found that the new economy in Russia is also thriving. The country’s leading bank, for example, is so much more than a traditional bank. Its digital ecosystem incorporates artificial intelligence (AI), big data and robotization. Already it reports that 40% of client queries are solved by its chat box, and it has created its own private cloud and collaborated with others to offer services such as video streaming, e-education, restaurant bookings and ride sharing. Similarly, Russia’s leading search engine has built an impressive ecosystem. Already successfully competing with Google, it offers services such as e-commerce, ride sharing and online music in a similar fashion to Apple Music. Initiatives include a Russian version of Netflix with a plan to create its own content, and it is even developing autonomous cars. Thus, it would seem that in addition to its continued dominance in the old economy of oil, Russia appears to offer a compelling investment pool for those wanting to ride the structural tailwind of the new reality where consumption and technology underpin tomorrow’s drivers of growth.