Tailwinds offer emerging markets growth momentum

Cameron said a number of wide-ranging factors — such as demographics and improving health care infrastructure — will aid the economies of emerging markets in the near future. By comparison, developed countries face the headwinds of aging populations, growing debt and rising health care costs.

“Ultimately, the stock market returns benefit when there is underlying structural growth,” he said. “And the developed world is really struggling for that. Everything that is a tailwind for emerging markets is a headwind for developed market equities.”

The Tokyo-based analyst said attractive valuations can be found in emerging markets.

“It’s a beautiful asset class for active managers because it’s less well-researched than developed markets. It’s less well-picked over and so there’s opportunities to buy assets very cheap,” he said.

He is particularly keen on India, South Korea and Taiwan.

“The Indian economy right now is flying,” he said. “India is kind of the poster child for that beautiful tailwind of structural growth that I talked about earlier: a young population, good population growth, increasing urbanization, increasing infrastructure, improving telecommunications infrastructure, a very talented population. I think India, both on a 12- to 18-month view and a very long-term view, looks very, very attractive.”

He described South Korea as “a beautiful success story,” going from one of the world’s poorest countries in the early 1950s to one of the most sophisticated and developed economies in the emerging markets index.

South Korea “has produced some of the very best companies in the world,” he said, citing Samsung Electronics Co. Ltd. as the world leader in research and development spending.

Taiwan has also distinguished itself as a high-tech power centre, he pointed out. The Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), for example, is one of the world’s largest contract manufacturer of silicon chips, rivalling long-time industry leader Intel Corp.

“On the memory side, Samsung is the world’s leading player in D-RAM and NAND memory. And on the computing power — the logic chip — side, TSMC is the undisputed leader,” he said. “So, the world has changed. Emerging markets, especially Korea and Taiwan, are the technological leaders in their respective fields, ahead of the U.S. or Europe.”

As for international trouble spots, Cameron said the outlooks for South Africa and Brazil are not favourable, largely because of Covid-19 and government efforts to mitigate its impact on their respective economies. Neither country entered the pandemic in good fiscal order. Brazil, in particular, brings serious concerns about debt deflation.

“Those are both relatively big countries where we have very little exposure because we think that both the equities and the currencies look vulnerable or over the next 12-18 months,” he said.

Cameron cautioned against an overly simplistic view of emerging markets.

“The biggest challenge for the emerging markets group as a whole is investor perception,” he said. “This is not a homogeneous group. It’s a varied collection of countries all muddled together in the same index. So, you have India and Philippines — countries very early in their development — in the same index as countries like Korea and Taiwan which have 10 times the GDP per capita.”

He said the divergence requires a selective approach to investing.

“This is a category that really requires a specialist approach, an approach that really understands the geopolitics, the sovereign risk of the countries themselves — not just the stocks listed in these countries,” he said.

Cameron cited Turkey as an example of the danger of taking a superficial view of returns. He said Turkish equities returns over the past decade exceeded 5% when measured in Turkish lira.

“But, of course, international investors don’t look at their returns in Turkish lira. They look at their returns in their local currency. And in U.S. dollars, it’s lost half of its value over the same period.”

The problem is not as easy to solve as simply hedging currencies, which can be prohibitively expensive, he said.

“Sovereign risk really matters; currency variation is much larger in emerging markets,” he said. “You can’t just be a stock picker in emerging markets because if you get the currency wrong, the currency can confiscate all of the investment returns.”

Chosen well, however, there are big opportunities to be found among developing economies.

“I think investors that have a relatively long-term view are going to be well rewarded by being overweight emerging markets relative to developed markets,” he said.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.