2Q 2021 Emerging Markets Equity Outlook: Stock Selection is Critical in an Uneven Recovery

Stock Selection is Critical in an Uneven Recovery

Portfolio manager Jin Zhang discusses EM businesses that are emerging from the pandemic in a position of strength

• Growth in many large EM economies has continued throughout COVID; however, EM countries are facing varying challenges and risks and an uneven recovery is underway. As such, stock selection remains critical.
• Some EM companies are emerging from COVID in a position of strength. One example is restaurant chain Yum China. Its in-store visits declined by 30% year-over-year when COVID hit. However, by ramping up its delivery business, it amassed a membership of 300 million customers, a 25% increase from the previous year. And some Indian IT services companies (HCL Technologies and Tata Consultancy Services) are responding to global demand. These businesses in the consumer and IT services space have pricing power and brand equity, and should be well positioned to withstand inflationary pressure and sustain their margins over the long term.
• The recovery in some consumer staples companies is lagging. For instance, Budweiser APAC‘s earnings are still depressed; but we think growth may recover meaningfully as the company is well-positioned as consumers look to upgrade to premium global brands.
• In the financials sector, in our view, leading private sector banks in India still have a long runway in terms of market share growth, have new emerging growth drivers, such as asset management and insurance, and valuations are still quite reasonable.
• Uncertainty has increased around the regulatory focus on the tech industry in China. E-commerce giant Alibaba remains in political cross-hairs with issues around merchant exclusivity, but over the longer term we expect the company to retain its dominant position. Other businesses such as Tencent have been less affected by competitive issues and with lower exposure to finance businesses (payment versus lending), it has not received much attention from regulators.
• We are optimistic that we will continue to find long-term growth opportunities in emerging markets in 2021. But as we expect the recovery to be uneven, it is important for active investors to constantly assess growth prospects, valuations and risks.

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