Emerging market economies with strong domestic structural growth stories are likely to thrive in the next 10 years, said Alexis Freyeisen, investment strategist for emerging markets equities at AllianceBernstein, during a session at the Canadian Investment Review‘s 2022 Investment Innovation Conference.
“There is a lot of negative press around EM and the media likes to talk about EM as a basket. . . . They mention the Sri Lankas and Argentinas and the other countries that have [International Monetary Fund] programs. Those are, pretty much, irrelevant for EM as an asset class.”
He added that it’s important for defined benefit pension plan sponsors to recognize that EM is a heterogenous assets class, noting that the 25 countries in the emerging market index each have individual politics, policies and cultural ethics. In some emerging markets countries, he said these factors are proving to be more advantageous than in others, so he recommended active management be used to manage allocations to EM equities. “Another misconception is that Globalization is dying. It is not, but it is changing. Trade integration has been very strong, particularly in Asia.”
The policies being pursued by developed countries is another factor likely to improve the fortunes of certain emerging markets countries in the next decade, said Freyeisen. Increasing geopolitical tensions with China are encouraging many Western-based companies to look towards alternative markets with access to educated workforces and large, low-cost labour pools. “Who’s benefitting? Not the U.S. or Europe, but Vietnam, Indonesia and India.”
Freyeisen went on to explain why two of these economies would benefit. Located just south of China, Vietnam is next to existing supply chain networks and provides easy access to ports given its long shoreline. With a population of just under 100 million people that are young, well educated but still mostly rural, Vietnam is a highly attractive location for manufacturers.
Indonesia, he noted, has undergone significant economic reforms over the past few years, which have made the country more attractive for foreign direct investments. These reforms have also coincided with an increased interest by global auto and parts manufacturers in the country because of its vast natural resources. These include nickel and copper, key ingredients used in manufacturing electric vehicles.
He also noted he doesn’t think the markets in the world’s most populous country will be abandoned entirely. “Existing supply chain capacity and manufacturing capacity will stay in China, though net new investment will be outside.”
In addition, he said he expects new opportunities to emerge as China’s economy opens up. “There’s going to be opportunities in the health-care sector. Its population is aging and the country is trying to move away from generic drugs to innovative drugs. There’s also going to be opportunities in the energy transition . . . though it’s likely Chinese authorities will adopt a heavier hand in the markets.”
While Freyeisen said he believes China’s economic position isn’t as strong as it once appeared, he’s confident it can re-accelerate in the near term. “I’m not saying China is in great shape and I’m not saying China is, necessarily, a strong structural buy. What I’m saying is, we basically put an ideology lens to China as opposed to a value lens. And at present there is tremendous value in China, particularly s they reopen their economies, which should provide a multi-quarter boost to corporate earnings.”
Beyond the near term, he said a large and evolving economy like China still provides opportunities: “There’s going to be opportunities in the health-care sector. Its population is aging and the country is trying to move away from generic drugs to innovative drugs. There’s also going to be opportunities in the energy transition . . . though it’s likely Chinese authorities will adopt a heavier hand in the shaping the economy going forward.”
While the political risks related to investing in China are significant, Freyeisen said these are often overstated. “There’s political risk everywhere in the world today. Obviously, the rule of law is — to be kind — a little less strong. What that means from a market standpoint is that there’s probably going to be a bigger risk premium built into buying these names.”
“I honestly think if you’re selling EM now, it’s going to be a textbook example of buying high, selling low.”
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