Bulls Return to Emerging Markets in NovemberNov 30, 2018

Three Things We’re Thinking About Today

  1. During the G20 meeting, U.S. President Donald Trump and Chinese President Xi Jinping reached a 90-day trade truce to allow both countries to negotiate a comprehensive trade agreement. The US will postpone increasing tariffs to 25% from 10% on US$200 billion worth of Chinese products, while China agreed to substantially increase purchases of American goods and negotiate on structural changes with the US. If no conclusion is reached, the US will raise tariffs to 25%. While the agreement was welcomed by markets and signaled both leaders’ desire to avoid a full-blown trade war, we believe that uncertainties remain as both countries look to reach an agreeable compromise. We will continue to monitor the situation and look for attractive investment opportunities in sectors related to health care, consumption and manufacturing upgrades, which over the long term, are less directly impacted by tariff regime changes.

Market Performance (MSCI EM Index, USD)

Cumulative Return

+ Turkey (13.1%) - Pakistan (-5.4%)
+ Indonesia (12.3%) - United Arab Emirates (-5.3%)
+ India (-0.4%) - Mexico (-4.8%)

Sector Performance (MSCI EM Index, USD)

Cumulative Return

+ Real Estate (9.7%) - Energy (-1.0%)
+ Industrials (5.9%) - Materials (-0.2%)
+ Consumer Discretionary (5.4%) - Telecommunication Services (2.9%)

Currency Performance (vs. USD)

% Change

+ Turkey (6.7%) - Brazil (-4.1%)
+ South Africa (6.5%) - Pakistan (-3.2%)
+ Indonesia (6.3%) - Russia (-1.8%)
Source: FactSet, one-month period ending 30/11/18
  1. The Indonesian rupiah and stock market were among the top emerging-market (EM) performers in November, as government and central bank efforts to stabilize the currency bore fruit, and the country continued to report solid economic growth rates. An increase in interest rates and a decline in oil prices also eased pressure on the currency and widening current account deficit. Overall, Indonesia has demonstrated continued resilience to external shocks, benefitting from ongoing reforms over the last decade that have sought to balance its growth drivers and accelerate domestic development. We continue to find potential investment opportunities in many sectors that benefit from existing demographics and expected reforms. These include banks, which lend to both fast-growing corporates and provide mortgages, credit cards and other retail banking products to consumers, as well as companies in the consumer, resources and infrastructure-related sectors.
  1. We are excited about the prospects for the EM pharmaceutical industry, particularly smaller companies. The sector looks promising to us due to three primary drivers: demographics, environmental and lifestyle changes, and innovation. The rapid pace of innovation is perhaps the most surprising driver we see for growth in these types of companies. In recent years, many leading developed-market (DM) pharmaceutical companies have struck partnerships with EM pharmaceutical companies. As increasing prosperity drives demand for health care and healthier lifestyles, EMs are becoming sources of significant growth for the pharmaceutical industry and a center for innovation within the industry itself. We believe this area offers exciting potential for investors, one that will be a significant driver of advancement in society in both EMs and DMs alike in the decades ahead. We are of the opinion that EM health care and pharmaceutical companies are just entering the early stages of development.


Investor sentiment towards EMs improved recently as dovish comments from US Federal Reserve Chairman Jerome Powell raised expectations of an interest rate hike pause in 2019 and led to a more bearish view on the US dollar. An announcement of a trade truce between the US and China post month-end could further support sentiment in the immediate term. However, over the longer term, uncertainties remain as both countries work towards reaching a more permanent solution.

We believe EM valuations have become more attractive as a result of low investor confidence earlier in the year, while cash flows improve and dividend payouts continue. Although EM earnings growth lagged developed markets in 2018, we expect EM earnings growth to resume momentum in 2019, as fundamentals remain strong and many EM currencies have adjusted significantly in 2018. While short-term volatility may continue, as value-oriented and long-term investors, we continue to seek companies that demonstrate sustainable earnings power and trade at a discount relative to their intrinsic value and other investments available in the market.