4Q 2020 Emerging Markets Equity Outlook: Emerging Stronger From the Crisis
Portfolio Manager Brian Bandsma focuses on companies that rely on domestic consumer demand and are less impacted by international trade flows and geopolitics.
Global monetary and fiscal stimulus continue to drive markets, possibly ahead of economic reality. Asia-Pacific, like the broader emerging markets category, has historically been very influenced by US monetary policy. That link has weakened over the last couple of decades, but remains a consideration.
Before COVID-19, China was dealing with the long-term challenge of slowing economic growth. The country is still reliant on infrastructure investment, which over time delivers a declining return, while in some parts of the economy there is a lack of a shift to consumer spending. China’s growing influence over the region presents a risk of contagion, should its growth slow or enter a downturn.
India can not afford a prolonged lockdown. Its economy slowed sharply but the consensus view from Indian companies is that they are returning to normal. That bodes well for the country’s recovery and we expect some economic indicators could turn positive quickly.
There is broad political support in the US for current policies directed at China. Most other major trading partners are also more in alignment with the US than China. Issues go beyond trade to human rights and China’s expansionist policies in the region. Geopolitical tension will remain a growing factor regardless of the outcome of the US election.
The longstanding problems with Chinese companies listed in the US are coming to a head. The challenge of verifying Chinese company financial statements means US listings will become less tenable over time. The modification of Hong Kong exchange rules to allow more secondary listings is timely. It should mean more investment going to Hong Kong and a decline in US IPOs of Chinese companies.
When confronted with geopolitical uncertainty, we mitigate risks in portfolio construction by focusing on companies that rely primarily on domestic consumer demand and are less impacted by international trade flows and geopolitics.