Singapore Retail Investors
Our insights on emerging markets
Will the trade war concerns change the way we invest in emerging markets?
Amid trade war concerns, we believe the impact of the current trade tariffs on emerging markets economic growth is limited but there are significant uncertainties as to how the situation might evolve. This has led to risk-off sentiment and a wider negative impact on the market as a whole. An escalation of the trade conflict into a full blown trade war - which is not our base case - is likely to be negative for risk assets like emerging market equities. The real impact of an escalation of the current trade conflict is likely to be felt more in industries which have US substitutes / competitors (e.g. automobiles, steel). On the other hand companies that produce goods that the US cannot produce in sufficient scale and quality should be more resilient (e.g. semiconductors).
In addition, over-supply is not as severe now in the commodity sectors (like steel and coal) and should not impact industries too badly. Hence, we expect the fallout to be limited as long as China continues on its path of reform and supply consolidation. In an environment of strong global growth, a pickup in capital expenditure may provide a natural offset. We continue to believe we are in the middle of a long upcycle for emerging markets, with the boom and bust economic cycles historically lasting 5 to 7 years. This upcycle is being driven by rising capital expenditure as company management gain confidence to invest, driven by improving corporate earnings, margins, economic fundamentals and commodity prices. In addition, return on equity (ROE) in the region is rising amidst declining leverage ratios.
Our emerging market equities portfolio is made up predominantly of companies with strong competitive moats and therefore we expect marginal fundamental change to their operating cash flows in the medium term. However, risk perception has risen and we expect heightened stock price volatility.
We continue to focus on long term themes (like rising incomes and premiumization) and the continued economic recovery. Our analysis show large opportunities exist at the sector level including in consumers (as incomes increase), internet/e-commerce (which is helping to leapfrog traditional channels in emerging markets) and financials (as economies recover and given low credit penetration).
Which markets are attractive in emerging markets?
It's Russia and Brazil.
Why is the sale of high-end beers growing faster than cheaper ones in emerging markets?
It's all about the lifestyle upgrade in emerging markets.
How do our emerging markets equities team identify good stocks?
Research trips are a key element in the team's stock picking process. These trips provide our emerging markets equities team a chance to find unconventional sources of information and insights. This can mean talking to the companies' competitors or to their suppliers and clients, or to independent industry experts. The information on the ground can differ from what management tells investors, so is often not priced in by international investors who do not take the trouble to do this type of research.
Street View documents these insights.