The emerging market opportunity

Although 2022 was a challenging year for emerging market investors, it was not all doom and gloom – by Andrew Ness

 
Emerging markets found support from a combination of events late in the year, leading the asset class to end the final quarter of 2022 with positive returns; here Andrew provides some insight into the opportunities for investors, and an outlook for emerging markets and reasons to be optimistic, including looking at growing economies such as India and Brazil and the sustainability of corporate earnings in EMs.

‘Looking ahead, the outlook for emerging markets is optimistic, supported by China’s pivot away from Zero-COVID, an easing of global inflationary pressures and prospects for a recovery in earnings growth in 2023. Lower inflation, however, can also be associated with a weakening global outlook, and the inversion of the US yield curve indicates a possible recession on the horizon. Economies such as India and Brazil, with a greater focus on domestic demand, are therefore better placed to weather a more challenging environment.

As the investment environment evolves, an important feature that we seek in emerging markets is resilience, in terms of both economies and companies. A particular area of focus for us is the sustainability of corporate earnings, whether in the face of COVID-19, policy changes, technology disruption or other challenges. We seek companies with structural growth drivers aligned with digitalisation, decarbonisation and premiumisation emerging as long-term winners.

It has been a difficult period for the emerging market asset class and challenges remain, but we are confident of the quality of companies that we invest in. These are well-managed businesses with robust balance sheets and operate in secular growth areas, whilst trading at attractive valuations. The solid fundamentals of our holdings and high level of portfolio diversification makes TEMIT well-positioned to benefit from the long-term potential in emerging markets.

To put this into context, if one had put £20,000 into UK cash savings in 2008, it would now be worth £20,960 15 years on. An investment into the FTSE 100 over the same period would be worth £46,774. However, if the same amount had gone into TEMIT, it would have returned you £49,856. That’s £28,896 more than in UK savings and £3,082 more than in the FTSE 100.

In addition to being undervalued and trading at a discount to developed markets, the emerging market asset class is under-owned, making them an attractive diversification option for global investors.
 
Andrew Ness is Portfolio Manager at TEMIT