Quality Growth Boutique

4Q 2021 Emerging Markets Equity Outlook: Helping to Identify Underappreciated Potential

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Ramiz Chelat

Portfolio Manager, Senior Research Analyst

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Helping to Identify Underappreciated Potential

Portfolio manager Ramiz Chelat focuses on growth amid the regulatory landscape in China and explores EM companies that are increasing market share.

 

  • While emerging markets have struggled this quarter, the growth potential of many companies is not fully appreciated by the markets. Opportunities exist for many quality businesses in EM to increase their market share at a faster rate than developed markets. For example, Shanghai M&G has 18% of China’s stationery business and is developing new categories such as B2B, and Voltas in India, a leader in air conditioning, is taking market share in the recently entered white goods space. Korean company Naver is using its strength in internet search to build its position in the growing e-commerce sector in a country where e-commerce penetration is relatively low. We feel in all of these cases industry consolidation is still at an early stage and much earlier than in developed markets.
  • Emerging market economies have not provided the same level of COVID-related stimulus as developed economies, which has resulted in their relatively healthier balance sheets and more sustainable fiscal positions. But we have seen sufficient stimulus, particularly in India, where the Reserve Bank of India (RBI) has provided liquidity that has allowed credit growth to resume. And China still has capacity to loosen monetary policy though it will be targeted given its longer term de-leveraging policy.
  • In China, the gaming, real estate, education and health care sectors are likely to remain under a cloud of regulation for the medium-to-long-term and unlikely to resume the growth trajectories they had prior to the crackdown. However, the consumer sector has been less impacted by regulatory risk, and there should be relative winners in the internet space, automation, EVs and battery technology.
  • Evergrande’s impact is spread across several regional banks. We don't expect a systemic default scenario although we do anticipate an increase in non-performing loans. The government is focused on reducing leverage with the more highly leveraged developers, which could result in defaults. Further, we anticipate investment in the property sector to decline by roughly 10% over the next 12 months, which has implications for commodities such as iron ore and steel.
  • In our view, India’s economy is well positioned for recovery after having endured strong macro headwinds. We believe there is a large set of quality businesses in India with strong, underlying idiosyncratic drivers across the consumer, financials and internet spaces.
  • Maintaining low volatility is important in emerging markets investing. We feel that high-quality, defensive growth names can take market share and protect in down markets, while companies driven by secular growth can capture upside potential.
  • Opportunities exist to buy stocks in high quality companies when markets are out of favor. Last year, India presented quality companies trading at attractive valuations. This year, China is showing similar potential. This approach can be an important source of alpha generation.

 

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