Global emerging markets roundtable
prices. Hence, we like to own a variety of leading companies across supply chains. Emerging markets is an area of high growth potential and high uncertainty, so it lends itself better to diversification to capture the opportunity.
What are you expecting to see in these markets over the next five years? Smith: What will determine outcomes in emerging markets in the near to medium term is whether people will be less con- cerned about the things they are con- cerned about today.
These include tensions between the US and China as well as the state of China’s economy.
Another concern would be Covid. Emerg- ing markets will have less flexibility to provide monetary and fiscal stimulus in response to future waves of Covid. But looking at vaccination rates and how, for example, India faired during the second phase, and what these new variants might mean, there might be scope for us to be less worried about Covid.
Another current concern is around the outlook for inflation and interest rates in the US, and the trajectory of the dollar. However, we do not believe it inevitable that the dollar will keep rising. If you con- sidered the US an emerging market, there
would be some fairly clear amber warning signs for the currency. But the dollar, of course, has a special status. It should be noted that we are not in a period of huge relative excesses in emerging markets, when you look at current accounts, real interest rates and credit cycles, and so emerging markets are relatively prepared for what is to come.
Looking longer term, emerging and fron- tier markets are the only places where you can find that low-base domestic demand opportunity. India is the poster child of that, but there are many other economies where you can get that. In North Asia, you can find globally lead- ing companies, as well as opportunities around the way in which China’s economy is changing. A lot of the industries we have talked about will be beneficiaries of that change.
The mindset of politi- cians and the media is still that China is going to buy everything, but the foreign direct investment figures show something different.
Georg Inderst, Inderst Advisory
If you get exposure to these things, they will treat you well in your exposures to emerging markets over the longer term. Pickering: In the wake of the pandemic, perhaps we will move from vaccine-deliv- ered medicines to tablet-driven medicine. If we can get that delivery mechanism through emerging markets that could have a positive aid on economic stimula- tion. It is the delivery of vaccines that is the challenge in many of these countries rather than the vaccine itself. Inderst: Emerging markets have always been volatile and will continue to be so. They have come through various cycles since the 1990s and allocations have slowly increased. Initially, it was listed equities,
utilities, banks and telecoms. Then it was sovereign debt, corporate bonds, and now private equity is going into emerging markets as larger investors feel more comfortable being invested there long term.
The story is still the same with today’s emerging and frontier markets. You are going for higher growth, diversification and a larger investment universe. We could talk about emerging market risks for another two hours but this should also
There will likely be a share price tailwind which emerging market companies will benefit from as they start to report ESG data more regularly and reliably.
Amandeep Shihn Willis Towers Watson
be seen in context. The main risk of run- ning a global portfolio is the US being more than 60% of the All World equity index and driven by five or six big tech companies. That is by far a bigger portfo- lio risk than anything we have discussed today. While emerging markets have had a bad couple of years, and significant risks remain, you could make a decent case for rebalancing that direction going forward. Treich: I am positive on emerging market equity and debt, but I worry that some of the episodes we had towards the end of 2021 and into January could be repeated in the sense that we have surges of volatil- ity around interest rate and inflation expectations. That is not a great environ- ment for assets perceived to be high risk. Hopefully, with more acceptance of the path interest rates and inflation are tak- ing, things should calm down and the fundamentals will come through. Gill: Emerging markets look pretty well valued. We have the best differential between them and developed markets for eight years. From that perspective, clients should have at least a market weighting to emerging markets. Developed markets are set for tighter monetary conditions, so I am positive at the current time on emerging markets.
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