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In this Q&A, Portfolio Managers Dáire Dunne and Niraj Bhagwat discuss today’s key emerging markets themes, including China’s evolving global relationships, an increased focus on sustainability and the impact of the COVID-19 pandemic.
What is the current state of the emerging markets (EM) opportunity set?
DÁIRE: As we think about today’s EM opportunities, I think it’s important to understand what has and hasn’t changed over the past decade. Though the last decade has seen underperformance relative to developed markets (DM), the growth picture remains very good across emerging markets. The demographic story is also still incredibly compelling. Emerging markets have 80% – 85% of the world’s population and 90% of the world’s expected population growth over the next few decades.1 In addition, EM’s huge working-age population is beneficial for productivity growth. Finally, the financial services sector’s EM opportunity set is still robust and has perhaps gotten even richer in the last 10 years with an increase of 15% – 20% in the number of publicly quoted stocks in EM (versus a 10% decrease in DM).2
There have also been other positive changes, in particular, in valuations. A decade ago, the price-to-earnings (P/E) ratios in EM and DM were roughly similar at 15.5. Today, P/E ratios in the developed world are north of 20 and emerging markets have gotten cheaper.3 EM valuations are now consistent with the compelling valuations from the Asian financial crisis and the global financial crisis (GFC). In addition, monetary policy is now incredibly loose relative to anything we’ve experienced historically. Fiscal policy is also providing both tailwinds and headwinds that favour different sectors of the economy than in the past. Lastly, overall economic stability has improved quite a lot, with debt levels and currencies looking much healthier than in the past 10 – 15 years.
NIRAJ: It’s also important to note that the recent DM outperformance was mostly the US. Europe’s and Japan’s performance have not been great in the last 10 years. In contrast, Asia — the largest part of the EM opportunity — has actually…
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1Source: World Bank. | 2Source: World Federation of Exchanges. | 3Source: Shiller P/E ratio from Jefferies Custom Products..
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