Premier Miton Macro Thematic Multi Asset Team
Emerging market performance goes in long cycles reflecting the dynamics of the underlying economies and stock market fashions. The 1980’s were the decade of the Asian Tigers, ultimately ending with the Asian financial crisis. The early part of the 21st century was the rise of China and BRICs period, culminating in the Global Financial Crisis and the QE decade which favoured large-cap, particularly US equities.
Potentially, we are now entering another period of material emerging market outperformance.
MSCI Emerging Markets Index relative to MSCI World Index
Source: Bloomberg, 12.04.1988 – 08.04.2022.
Considering emerging markets as a whole ignore the reality in our opinion, as each previous bull phase has been driven by a particular country or region. The various components of the universe have very different economic and sectoral compositions. China is obviously a big export and construction driven economy. Its stock market is dominated by a small number of big-cap tech stocks, which in turn dominate some emerging market indices. Taiwan and India are the next biggest components, and these markets are also very technology heavy; semiconductors in Taiwan’s case and IT outsourcing in India’s.
So arguably the case for emerging markets is undermined by the inflation, rising bond yield case we have been making for some time. However, the large Chinese internet companies have already more than halved and semiconductors are one of our favoured areas longer term. Emerging markets may be relatively more immune to rising interest rates than they might at first appear.
For us, however, the interest in emerging markets comes largely from elsewhere. We have written notes recently discussing the deglobalisation theme and the increasing importance of access to energy and other raw materials. As a consequence, certain emerging markets have renewed attraction, having been out of favour for some time. Behind those top 3 emerging markets sit Brazil, Saudi Arabia, South Africa and various other countries. Many of these may come strongly into favour as a result of being commodity producers and not consumers, in a world where resource scarcity is becoming an issue. These emerging markets have traditionally done well in periods where commodity prices are strong.
One concern about emerging markets has been government indebtedness leading to default or currency weakness. This is, relatively, less concerning now, given the high levels of debt to GDP seen in the developed world and the benefit these countries will receive both in terms of government revenues and foreign exchange from higher commodity prices.
We have recently made some tentative increases in emerging markets both in bonds and equities – still relatively small positions, as we have material exposure to the trends driving these markets in our equities elsewhere, especially our exposure to materials. We do expect however, to be watching these markets much more closely than we have in the recent past.