Inside the mind of investors - July 2024
The markets tell us what investors are doing. But what, exactly, are they thinking? Towards the end of every month, Edison takes you: Inside the Mind of Investors.
As we move through 2024, global markets continue to navigate a complex landscape shaped by geopolitical tensions, economic uncertainties and technological advancements. Investors are grappling with persistent inflation concerns, central bank policies and the ongoing effects of geopolitical events on global trade and supply chains.
In developed markets, the focus remains on monetary policy decisions, with particular attention on the Federal Reserve’s stance and its implications for global liquidity. The tech sector, especially in the United States, continues to drive market performance, buoyed by advancements in artificial intelligence (AI) and cloud computing. However, questions about valuations and the sustainability of growth persist.
European markets are contending with sluggish economic growth and the ongoing energy transition, while Japan’s market has seen renewed interest from global investors, driven by corporate governance reforms and a weaker yen.
Emerging markets: A landscape of diversity and opportunity
Against this global backdrop, emerging markets present a diverse array of challenges and opportunities. The overall sentiment is one of cautious optimism as these markets adjust to shifting global economic and political dynamics.
Shifting supply chains and economic growth
Amber Gordon of Fidelity International highlights the significant impact of changing global supply chains on emerging markets. Nearshoring is providing a substantial boost to economies like Mexico, with Gordon pointing to specific beneficiaries, such as Grupo Mexico Transportes in logistics and GCC in the cement industry.
While China might appear to be losing out in this scenario, Gordon notes that Chinese companies are adapting innovatively. For instance, BYD is establishing manufacturing facilities in countries such as Brazil, Hungary and Thailand, while Zhejiang Sanhua Intelligent Controls is setting up operations in Mexico. This adaptation demonstrates China’s increasing integration into global supply chains rather than remaining isolated.
Emerging middle class and digitalisation
The emerging middle class remains a crucial growth driver in these markets. Gordon emphasises the potential in Indian financials, both for large private banks, like HDFC Bank, and smaller cap names, like Five-Star Business Finance (a micro small and medium enterprises lender). Consumer names in frontier markets, such as Saigon Alcohol – Beer – Beverage Corporation in Vietnam, are also benefiting from urbanisation trends.
In the realm of digitalisation and AI, Gordon sees emerging markets as a relatively cheaper way to play this theme, with exposure to companies like Taiwan Semiconductor Manufacturing Company and other AI-exposed names such as Wiwynn.
Corporate governance and shareholder returns
Gordon notes encouraging signs in corporate governance, particularly in China, where companies are initiating efforts to boost shareholder returns. Vipshop is cited as a key example, returning approximately 10% of its market cap to shareholders through buybacks and dividends.
Improvements in corporate governance are also evident in other regions, such as Poland, where recent elections have led to positive management changes at some state-owned enterprises.
Valuations and market opportunities
Attractive valuation opportunities are seen in markets like Brazil, currently trading at around 7x P/E. Gordon points out that these valuations may be obscuring positive drivers for the market, such as expected interest rate cuts and strong terms of trade.
In China, a significant derating has created opportunities in high-quality consumer stocks, though challenges persist in sectors like property.
Megatrends driving emerging markets
Charles Jillings of ICM suggests the megatrends shaping emerging markets are as follows:
Jillings emphasises that these trends are accelerating urbanisation and the rise of the middle class, fuelling demand for transport, communications and social infrastructure.
Regional focus: Central and Eastern Europe
The Central and Eastern European region receives special attention from Jillings. He highlights the tailwinds from EU budget allocations and nearshoring driving inward investment. Poland’s GDP per capita has surged 103% since joining the EU and the region boasts low unemployment, a competitive cost base and improving education standards.
Outlook and potential outperformance
The potential for emerging market equities to outperform developed markets hinges on several factors, including the interest rate environment, signs of recovery in China and a positive outlook for commodity prices, especially base metals like copper.
In conclusion, while global markets face numerous challenges, emerging markets offer a wealth of opportunities for discerning investors. The combination of attractive valuations, structural growth drivers and improving corporate governance in many regions presents a compelling case for investment. As always, careful analysis and a nuanced understanding of local and global dynamics will be key to navigating this complex but potentially rewarding terrain.