The strong rally in EMs last year was led by a few select industries and companies, largely mega-tech, as information technology and communication services companies saw major upward earnings surprises, a product of the world’s forceful entry into a remote posture and virtual communications.
As EM economies recover, the opportunity to participate in growth beyond these narrow areas is very attractive for institutional investors. Emerging Markets Discovery Portfolio Manager, Ernest Yeung, is positive on the financials sector, for example, particularly the disparity in banks, where some are trading at near-record lows while others are back at pre-pandemic levels―a disconnect that affords the opportunity to invest in quality businesses at attractive valuations.
We believe there are better risk-adjusted opportunities available to EM investors in a post-pandemic environment, particularly in “old economy” sectors, like airlines, telecoms, capital goods companies, and transportation. These segments of the market were indiscriminately sold off during the lockdown.
As institutional allocators consider the disparity between the extreme EM equity valuations between growth and value, we note that a significant portion of exposure to EM assets is allocated to strategies that are core or growth investment styles, not value. This presents an opportunity to invest in areas of EMs that are largely undiscovered and overlooked.