Emerging Markets Insights: Finding Opportunities in VolatilityAug 31, 2018

Key Points

Three Things We’re Thinking About Today

  1. Sharp falls in the Turkish lira and Argentine peso stoked contagion concerns, knocking down emerging-market (EM) currencies and stocks in August. We believe the asset class is far from experiencing a severe crisis. Turkey makes up just a small part of the EM universe. Within the MSCI Emerging Markets Index are over 20 companies whose individual weightings are larger than Turkey’s as a whole.1 Argentina is not in the index, and its weighting is expected to be even smaller than Turkey’s when it is included in 2019. Ultimately, emerging markets are a group of diverse countries with markedly different economic and political climates. While sensational headlines often cause indiscriminate selling across emerging markets, we can use this opportunity to invest in fundamentally sound companies at what we consider to be attractive valuations.
  2. Shares in several online gaming companies came under pressure as regulators in China announced the possibility of limiting the number of new games, as well as the number of hours children spend on these games. An ongoing suspension in new game approvals—the result of a restructuring in government agencies—weighed on the industry. We maintain a positive view on the industry as we believe underlying fundamentals remain solid. We expect select companies to benefit from increased monetization of existing popular games and continued growth in other businesses, including digital content and online advertising.
  3. Comprising over 20,000 companies with an aggregate market capitalization of more than US$5 trillion and daily turnover of about US$40 billion2, we believe the EM small-cap asset class offers investors the potential for a significant opportunity. EM small caps are more likely to be driven by domestic demand, favourable demographics, local reform initiatives and innovative niche products. In our view, EM small caps offer attractive risk/return attributes in the current global economic environment, as exposure to the EM small-cap space typically complements exposure to the EM largecap space, particularly in areas such as health care and consumerism. Moreover, given the size of the investment universe, EM small caps have generally limited research coverage, often resulting in mispriced stocks and providing active investors with attractive investment prospects.

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This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.