Portfolio Manager John Paul Lech analyzes today's opportunity set in global emerging markets.
Q: With U.S. markets so strong, what's the rationale for emerging markets?
We believe the number of great companies poised to come out of emerging markets is increasing, in terms of absolute number and also magnitude of impact. The MSCI Emerging Markets Index is starting to reflect this dynamic. Having undergone drastic changes in the past decade, it now includes companies at the forefront of important global developments, including health care and technology firms that are closely aligned with how consumers make economic decisions in coming years. This positive trajectory is a key reason in our view for investors to include an allocation to EM as part of any well-rounded portfolio.
Q: Where do you find opportunity amid the nascent economic recovery?
Overall, economic recovery is of course a good thing. At the individual company level, though, it's more complex. A business could disproportionately benefit from changes in consumption patterns that have occurred during pandemic-related lockdowns and restrictions—as life goes back to normal, it could actually do worse. Likewise, depending on the trajectory of the recovery, companies that were suffering amid the lockdowns could suddenly experience a quick acceleration in earnings and profits. It really is company by company, so it's important to understand how external stimuli might impact the earnings, profitability and prospects of the companies.
Q: Sentiment toward emerging markets can shift based on news headlines and other short-term inputs. What's they key to staying invested and unlocking growth?
An active approach to security selection, as well as maintaining a long-term time horizon, are essential to unlocking the growth potential of emerging markets. Regarding market timing and the choice to stay invested, few people can consistently time the markets. There is a lot to be said for the old adage, “It's not about timing the market, it's about time in the market.” Additionally, we should remember that the longer your time horizon, the less risky equities are because of the value of compounding.