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PRODUCTS&MARKETS EMERGINGMARKETEQUITIES


The policy flexibility in China and Korea leads us to an overweight position in those two countries


WILLEMSELSHSBCPRIVATEBANKING


MrSacksexpects theUS–China relationship to remainunchanged. Recent months have seen


bipartisan support in the US for confronting China on issues like trade, market access and protection of intellectual property, and those things will not change no matterwho occupies the WhiteHouse, he says. Butwhat might is the tone of the discussions. “The level of diplomacy will be


calmer, although the direction will similar. But if Biden wins then the US–EUrelationship will improve, so you have the potential for a more multilateral approach fromtheWest towards China.” The China–US relationship is not


just a political one, points out Willem Sels, chief market strategist at HSBC Private Banking; rather, companiesmake decisions too. “It is, to a large extent, the


companieswho decidewhere to have their production facilities and so on, so investors can manage the situation by focusing on those companieswhich have exposure to China’s domestic market.” He sees plenty of potential in


Chinese tech companies, despite the headlines generated by the likes ofHuawei. “Whenyouactuallydrilldownto


the percentageof profits theChinese techcompaniesmakeoutsideof China, or that theymakein theUS, it is quiteoftenextremely limited,” says MrSels. “In fact theyareawayof diversifyingawayfromthe bigUStech names,wherethere isalot of headline risk,beit regulation, taxes or the outcomeof the election. InChina,alot of the technamesareeither targeting the localdomesticconsumer, or it is reallybenefitingfrominfrastructure spendingfromthegovernment.” Whenthereisalot ofuncertainty in theworld, as is certainly the case at the


70 OCTOBER/NOVEMBER 2020


moment,aprudent investorheads for quality,hesays.Thatmeansboth qualitystocks, withstrongbalance sheets,andqualitycountries, those withstrongfundamentalsand flexibility in termsof fiscalpolicyand monetarypolicy. “Thecountries withpolicy


flexibility areRussia,ChinaandKorea. Russia stillhasalot ofheadlinerisk andis very cyclical,andis very related to theoil price, soweareneutral there despite thepolicyflexibility.The policyflexibility inChinaandKorea leadsus toanoverweightpositionin thosetwocountries.” Innovationandtechnologyhave


beenthe drivingforcesbehind the recovery inemergingmarkets fromthe Covid-19fallout, says ChetanSehgal, leadportfoliomanager atTempleton EmergingMarkets Investment Trust. “Wecontinuetohaveahigh


conviction for innovative technology companies withinourportfolio. Lockdownmeasuresandsocial distancinghaveenforcedthegrowth of effective digitalcommunication, speedier food deliveries,enhanced onlinelearningplatforms, better entertainment streamingandonline shopping,”hesays. Outsideof technology,MrSehgal is


optimisticabout the long-termoutlook forconsumptiongrowth, particularly in the trendof“premiumisation”, whereconsumers inemergingmarkets arekeentoupgradethequalityof goodsandservices theyconsumeas theirwealth rises. Ashasbeenthe casewith global


markets, investorswhohavemissed outontechandgrowthstocksover the past yearhave facedan“uphill battle” inemergingmarkets, says IanBeattie, portfoliomanager of theNedgroup InvestmentsGlobalEmergingMarkets fundandco-CIOofNSPartners. Heasks if it is time to start talking about the “Pacific Century”, since the


best returns fromdeveloped and emergingmarkets are fromChinese andUStech, andmost of these names are headquarteredonthewest coast of theUSandpart of the east coast of China. “If the 19th and20th centuries were about the Atlantic, with London andNewYork, thenmaybe the 21st is about the Pacific withHangzhouand the SiliconValley.” While thefundamentals of the


componentcountries areimportant, emergingmarkets asanasset class is drivenbyglobal economicmomentum andliquidity.Globalmoneygrowth hassurgedto its highest level since the 1970s, saysMrBeattie, signallingboth strongeconomic prospects for 2021 and“excess” liquidity,someofwhich is likely to flowbackintoemerging markets. Stronger growthwould suggests broaderupwardpressureon commodity prices,while theFed’s commitmenttoaninflationovershoot reduces the riskof renewedUS dollar strength. “Ouremergingmarketchecklist of


theseandother factors is givingthe mostpositivemessagesince2016,”he adds.“Thesuggestedscenariowould probablybeassociatedwitharecovery inperformanceof cyclicalmarkets, suchasBrazil,RussiaandIndonesia, withthis year’s safehavens— includingChina—lagging.” Althoughemergingmarket


equities have delivereda similar return to developedmarkets over the very long run, therehave been sustained periods of out-and underperformance. “Wewould suggest that a core


positionshould besmall but investors shouldbe prepared tomove significantlyaway fromitwhen a large emerging/developedmarket divergence is coupled withan opposite shift in macro checklist factors—asmay be occurring currently,” saysMrBeattie.


PWMNET.COM


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