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Rob James

Market Outlook

Emerging Markets (Unconstrained) Outlook

Outlook
10 August 2023

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Emerging Markets Portfolio Manager

Latest Emerging Markets (Unconstrained) economic and market outlook. 

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Our base case is that inflation in the US has peaked, and that interest rates are very close to doing so. With economic data continuing to surprise on the upside, we also expect the US economy to see a soft landing, which would be a laudable achievement given the scale and speed of rate hikes. As US rates peak and the dollar weakens, this should be a supportive environment for EM equities, particularly as central banks across the asset class are now leading the world in cutting rates. Over the last month, we have seen Chile and Brazil surprising the market with 100bps and 50bps cuts, respectively. Both central banks indicated that there is more to come if inflation remains well behaved. So far Latin American economies have been performing well due to improving exports, but such monetary easing should boost growth further by reinvigorating domestic demand. 

In Asia we are most optimistic about domestic demand stocks in structurally attractive markets such as India and Indonesia that will also become more cyclically attractive as US yields begin to fall and the dollar weakens. We are largely concentrating our exposure in these economies in the Financials sector, which we expect to grow faster than the wider economy due partly to low levels of credit penetration. This positioning is also reflective of the fact that many stocks in the sector appear exceptional cheap. To take just one example of a current holding, Axis Bank trades on a P/E multiple of only 10x for a bank that should compound earnings at 20% per annum.

Clearly the fund has been hurt in recent weeks by being underweight China, where stocks rallied in anticipation of potential stimulus. However, we plan to remain underweight China as we have far higher conviction in the growth potential of other markets. The China bulls make the case that it is cheap versus its history, but it is only 15% below its long-term average multiple. We do not see this as particularly attractive, given the structural challenges facing that market, particularly as the markets we prefer are also cheap versus history. Thus, we do not believe that investors need to take on the risks associated with China to obtain exposure to value in EM.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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