Latest Emerging Markets (Core) economic and market outlook.
It is easy to imagine many investors looking at how far equity markets have bounced and concluding that they must now be expensive. However, whilst there are clearly parts of the market that are expensive, in particular growth stocks and defensives, many stocks had barely rallied at all until late May, and in many cases still languish near GFC valuation levels. These value stocks are now beginning to rebound, and we believe this can continue as lockdowns around the world are eased and the industrial economy begins to rev up again.
In our view, investors are failing to appreciate just how materials intensive the stimulus package in China is likely to be. Indeed, over 80% of it is reserved for China’s ‘traditional’ industrial sectors rather than the ‘new’ economy. This is already having an impact, as evidenced by the fact that Chinese steel production rose to a record high in May, and copper has now entered a bull market as a result of strong demand from China. Consequently, we have been increasing the portfolio’s exposure to value stocks such as iron ore miner Vale in recent weeks. This is not to say that we expect a pullback in large-cap growth stocks. While many have indeed rallied significantly, it is difficult to see a catalyst for them to correct in the near term. Many are beneficiaries of pre-existing structural growth trends that have been accelerated by Covid-19, including e-commerce and the work from home economy. They also have strong balance sheets and are beneficiaries of low interest rates, which boost the valuations of long duration growth assets.
India has clearly been a source of pain for the fund this year. However, with the Indian economy beginning to open up again, we are becoming even more constructive on the country and retain our positions here. We also believe that investor concerns about Sino-US relations, US elections, and a precipitous drop in Western demand may increase interest in markets such as India, where the economy is more focused on domestic growth.
Elsewhere in Asia we are positive on Vietnam, where Covid-19 has thus far remained firmly under control. As a result, Vietnam’s economy is further down the line in terms of its lockdown easing. For example, its shopping malls are open and visitor traffic is normalising. Longer term, all the reasons that we have liked Vietnam for some time remain in place, and in many ways have been reinforced by Covid-19. Companies were already looking to diversify their manufacturing base away from China, with Vietnam a major beneficiary of this trend. However, Covid-19 has delivered a huge shock to the supply chain, highlighting the dangers of having production facilities that are too heavily concentrated in one place. It therefore gives businesses another reason to diversify away from China, as do deteriorating Sino-US relations.
Outside of Asia, our views and subsequent positioning remain largely unchanged. We are still running the Brazilian overweight and have increased Russian exposure, partly as we are slightly more positive on the domestic economy. Conversely, we remain largely disengaged from South Africa, where we see the impact from Covid-19 as more terminal than in other countries.
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).