Emerging Markets: Old Myths & New Realities
Innovation, governance, growth and inflation are discussed by WCM's Mike Tian and Reshma Kapadia of Barron's.
Here are some highlights:
Some still view emerging markets as traditional commodity-oriented sectors. Have new business drivers changed that?
How do you see the Covid-19 recovery unfolding in emerging markets?
More broadly, this is a very uneven recovery. China got back to sort of pre-pandemic growth last year and was the only major economy to do so. The International Monetary Fund (IMF) has come out and said many countries are not going to get back to pre-pandemic growth levels until 2023. So countries like India, where the expectation was for sort of a very sharp, V-shaped recovery, are now reassessing that situation. And in Africa, there’s a major challenge going on with vaccine deployment so we’re going to see that recovery take longer.
Many investors believe emerging markets are not innovative. What are your thoughts?
But on the other axis, they are lacking on basic research. For example, if you want to create the next amazing oncology drug you probably won’t find that in emerging markets. Things like the quality of university educations and government support are still, by and large, stronger in the US, Europe, and Japan. EM countries are catching up, but it’s going to take a long time for them to match developed market countries.
What are your views of corporate governance?
I think the bigger issue, however, is that even if you have strong governance, there is still the behavior of the government. So in China, with companies like Alibaba and Tencent getting ensnared in some of the anti-monopoly measures, it does raise questions for investors. I think the other risk is that as US/China tensions ramp up, some people think that China exposure could be a little bit like fossil fuel exposure in people’s portfolios. So there are lots of questions out there for investors.
What investment opportunities are you seeing in Latin America?
How might international trade and inflation be impacting EM countries?
As for inflation, obviously higher rates are not a good thing broadly for emerging markets and I think it could be a broad level headwind for the asset class generally. Inflation could be much more difficult for certain countries, like Brazil, who have fiscal situations that are not where they need to be at this point in time.
What’s next for emerging market countries?
I think there is going to be a lot more to come, and not just from China but a lot of other places, too. There will be big ecosystems and business models built around these things, and then increasingly they will be transplanted to developed markets. So, if you are a developed market equity investor, I think it’s time to start looking to emerging markets for inspiration to see who is going to be the XYZ of the US. It’s going to be a really exciting thing to watch over the next decade.
WCM deeply analyzes the culture of a company before investing. How does that apply to the EM world?
The founder is often relatively young and has a lot of power – and actually has a much bigger imprint on the organization and culture of the business. And the things that a leader can get away with as “normal behavior” are very different in India versus China versus South Africa. For example, when you see a company treating employees a certain way, you have to think, well, is that normal for that country or does that stand out in a certain way. So as far as culture goes, you can’t take a box-checking approach and view everything the same for every geography. That’s why in China we spend more time understanding what the company and the founder is all about.
Reshma Kapadia is not affiliated with Natixis Investment Managers and is independently responsible for expressed views and opinions. The views and opinions expressed by the speakers are as of May 12, 2021 and may change based on market and other conditions.
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