Banks and insurance companies are like proxies for economic growth in developing countries, says Mark Gordon-James, Senior Investment Manager at Aberdeen Asset Management.
Mr. Gordon-James, what is the cause of the recent good performance in Emerging Markets?
Signs of an improvement in economic activity in China, alongside the rally in oil and other commodity prices, has propelled demand for Emerging Markets (EM) assets since February – hence we’ve seen fairly large inflows to the asset class in recent weeks.
Also we have seen a weakening of the dollar, which is perhaps a sign that recent declines in EM currencies had been exaggerated and therefore we may now enjoy a more stable currency environment going forward. Any indication that the U.S.-Federal Reserve will further delay the normalization of interest rates in the U.S. will be supportive in the current environment.
Is this improvement sustainable?
It would be naïve to downplay the severity of the headwinds facing EM. Yet, it’s equally detrimental to get caught up in the negativity and miss the broader, more balanced, picture. Rate hikes in the U.S. could still weigh on demand for EM equities, the Chinese economy is likely to continue to slow down as faces its various imbalances, and commodity prices could yet see a decline once more.
That said, outside of China and the commodities sector, the earnings cycle seems to have bottomed and thus EM corporates should deliver reasonable earnings growth this year in local currency terms. EM governments are making more strenuous efforts to support economic growth through various domestic reforms and support for infrastructure investment.
And in the meantime, public and private sector balance sheets are generally robust across most of the EM world, so we don’t foresee major issues with debt. Thus after a few years of slowdown we believe the EM asset class is now much better positioned to launch a sustainable recovery.
What emerging countries do you like?
Our country exposures are a direct result of our stockpicking approach. India is our largest country position because we find a number of quality businesses there. The election of Narendra Modi has sparked hopes of a revival in the economy and whilst we are not as optimistic as some in terms of government being able to deliver all the necessary reforms, we believe our Indian holdings have very good long-term prospects.
Elsewhere we have significant exposure to Brazil, Mexico, Philippines, and Thailand, again because we find some very well run companies with good earnings potential.
What kind of sectors offer the greatest potential?
We hold a number of consumer staples companies in our portfolios, supported by our conviction that domestic consumption in emerging economies will be driven by the expanding middle class and its increasing spend on branded consumer products.
We also like financials as we see companies in the sector as proxies for economic growth in developing countries; our financials holdings include local retail banks, life insurance companies, and real estate developers with a focus on shopping malls.
Mark Gordon-James is a Senior Investment Manager on the Asian equities team. He joined Aberdeen Asset Management in 2004 from Merrill Lynch Investment Managers where he worked with the emerging markets team. He graduated with a BSc in Geography and Economics from the London School of Economics. Gordon-James is a CFA Charterholder.
