April 30, 2021
As US inflation began to come into greater focus in February, market participants reacted, leading to volatility in emerging markets. Additionally, the reflation trade resulted in a rotation from growth to value, according to the BNY Mellon Global Emerging Markets team.
While there have been market fluctuations, the long-term opportunity in emerging markets remains unchanged. High levels of income growth, increased product penetration and room for industry consolidation could mean the best is yet to come for the asset class, according to the team.
“We believe there is a unique opportunity for emerging-market companies that are well exposed to reliable secular-growth trends. Particularly those that can exploit this opportunity in a superior manner to their peers by virtue of differentiated customer offerings and execution,” the team says.
“Despite challenges like aging demographics and high global debt levels, we’re seeing exciting innovation and change, and pockets of sustainably fast economic growth.”
However, what started as a powerful year for emerging markets has somewhat fizzled out. China, which posted positive Gross Domestic Product (GDP) gains of 2.3% in 2020, one of the only major economies to expand last year, weighed the asset class down during Q1. This was partially because it fared better than others last year, making it less of a reopening play, according to BNY Mellon Global Emerging Markets manager Ian Smith.
He adds that China’s other points of weakness can be attributed to less stimulative monetary policy, worries about regulation in certain sectors, and turbulent relations between it and the US.
But—even with near-term headwinds—China still offers opportunities at the individual security level. During the first quarter, the team established a position in a leading supplier of electricity hardware and software to the Chinese state grid.
“The company is structurally well positioned to benefit from growing investment in ultra-high voltage (UHV) transmission, electric-vehicle charging and digitisation of the electrical grid,” the team says. “The stock currently generates mid-teens returns, but this should grow as the company’s product mix becomes more software-focused, and as China increases expenditure on its grid.”
Elsewhere, India’s economy climbed out of a recession posting an annual growth of 0.4% in the fourth quarter of 2020. It’s there where the team found another opportunity to add to its portfolio.
This came in the form of a “well-managed, capital-light, high-quality” Indian IT (information technology) company. It’s the second largest company in India by market capitalization, and one of the largest IT companies in the world, with annual revenues in excess of US$22bn. Relative to the broad technology universe, it has delivered top quartile returns on invested capital, according to the team.
“The company benefits from thematic growth, driven increasingly by digital transformation, and by facilitating its clients’ moves to cloud-based infrastructure. A further attraction of the business is that it’s highly cash-generative and is expected to return over 90% of its free cash flow to shareholders via dividends and share buybacks,” the team says.
Both the new Chinese and Indian holdings are in the information technology sector, in which the team had a 27.17% weighting compared to the MSCI Emerging Market index’s 20.92% at quarter end.1
Asset prices, including those in emerging markets, could be vulnerable if inflationary pressures in the US become more acute, according to the team. They add that emerging markets would likely fare better if inflation is more benign, particularly if it is consistent with a promising global economic rebound. Other supportive factors would be if a weakened US dollar remains the status quo and accommodative monetary and fiscal policies continue.
“We are conscious that these variables can influence outcomes, both positively and negatively, for emerging markets in the months ahead,” the team says. “However, our focus is longer term and we remain excited about reliable and large-scale compounding opportunities in the countries where we invest,” they conclude.
1 Figures as of March 31, 2021.
All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Digital assets can be volatile and subject to fluctuations in value.
Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.
This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, strategy, investment manager or account arrangement, and should not serve as a primary basis for investment decisions. Prospective investors should consult a legal, tax or financial professional in order to determine whether any investment product, strategy or service is appropriate for their particular circumstances. Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
"Newton" and/or the "Newton Investment Management" brand refers to Newton Investment Management Limited. Newton is incorporated in the United Kingdom (Registered in England no. 1371973) and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Newton is a subsidiary of The Bank of New York Mellon Corporation. Newton is registered with the SEC in the United States of America as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request.
BNY Mellon Investment Management is one of the world’s largest asset managers, with $2.2 trillion in assets under management as of March 31, 2021. Through an investor-first approach, BNY Mellon Investment Management brings to clients the best of both worlds: specialist expertise from eight investment firms offering solutions across every major asset class, backed by the strength, stability, and global presence of BNY Mellon. BNY Mellon is the corporate brand of the Bank of New York Mellon Corporation and may be also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
© 2021 BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York NY, 10286
Not FDIC-Insured | No Bank Guarantee | May Lose Value