3Q 2020 Global Equity Outlook: Poised for recovery, but choose carefully
Jin Zhang discusses the emerging markets rebound, opportunities in Asia and Latin America, health care, consumer staples, and technology, and shifting supply chains.
Second quarter was driven by risk-on sentiment, despite ongoing uncertainty. All sectors in the index gained, following the first quarter when all sectors declined. While equity markets were rather indiscriminate, we expect them to become more differentiated going forward. Countries and businesses with stronger fundamentals should do better than the weaker ones.
In emerging markets, it pays to be selective. Investors should drill down to the business level to select high quality companies that can remain profitable even when the country is going through a recession. Innovative businesses, such as e-commerce, can create their own growth in countries with slow or no growth, or that are severely impacted by other factors such as COVID-19.
Many emerging economies borrow in local currency and have been careful not to enlarge government debt too much. They are steering away from currency crises and showing fiscal restraint, which is positive from an asset allocation perspective.
There are opportunities to find innovative and deeply-entrenched businesses in Latin America. For example, Mexico’s Walmex has 30%-40% share of organized retail, while also investing in omnichannel retail. Such businesses can do well despite volatility. In addition, local currency borrowings give businesses breathing room for growth to return and allow investors to be patient.
Investors with a long-term view can find attractive companies in Asia. Consumers are coming back to premium beers as the COVID-19 impact subsides, which should benefit companies like Budweiser APAC. There is also potential for long-term growth in technology, including software, hardware and semiconductors.
COVID-19 is highlighting the need for better health care in many emerging markets. While many health care stocks have traded strongly, some have gotten ahead of fundamentals. But opportunities do exist, such as private health care in countries like Brazil. In generic pharmaceuticals, competition is high and it is difficult to sustain profitability.
Many industries are rethinking supply chains over the long term. Changes can happen in surprising ways and it is important to look industry by industry. Some segments of health care will be, or should be, reshored, some like autos and auto parts will be near-shored, and others including textiles will relocate from one emerging market to another.
A company with quality characteristics, such as low leverage, repeat demand and pricing power, can survive in the short run. But over the long run, sustainability is most important. Companies with visible and predictable earnings power over the next couple of years will reward investors.