As the economic recovery continues to broaden out, how do you see the emerging markets?
At the moment, one area of concern we have is that valuations have risen across asset classes including emerging market equities. However, there are still many great companies—characterized, in our view, by both their quality and adaptability—across emerging markets where we believe valuations are supported by fundamentals.
In general, emerging markets do well when global demand is rising and when local currencies are strong. There are reasons to believe both of those conditions are present right now. First, the world is coming out of a synchronous slowdown caused by the pandemic and while some geographies may recover faster than others the general direction of travel, in our view, is positive. Second, many large central banks within emerging markets have already started to tighten, which is supportive of currencies. Finally, the specter of higher inflation tends to bode well for commodity prices, which benefit certain geographies. The transient vs. structural nature of inflation can be debated, but aggregate demand appears to be coming back. The investable universe of emerging markets, however, is typically more influenced by tech than commodities. Within both the U.S. and emerging markets, the initial market rebound back in 2020 seemed to emphasize growth at any cost, which has reversed now. In general, we are seeing a rotation favoring concrete growth or more quality growth. It’s healthy that market performance broadens out a bit. In our view, the market favors a flexible approach, not a dogmatic factor-based one.
Where are you seeing opportunities in emerging markets?
The past year has been extremely volatile. Looking back to May 2020, we were in the middle of a global pandemic. At the time, most experts believed we’d get a vaccine eventually with probably 50-60% efficacy and no one knew when vaccines might be available. By November, we had several options with higher efficacy, which is remarkable. We saw pronounced changes to consumption patterns, the acceleration of existing trends and a sea of liquidity unleashed by central banks and government policy makers. It remains to be seen how lasting everything is in the next normal. There have been false starts to reopening but emergence to the next normal seems increasingly likely. As we’ve gotten closer to whatever that next normal is, we’ve widened our approach which has led us to themes like tourism or real estate which complement some of the themes that have been present in our portfolio throughout, like e-commerce.