Emerging market opportunities rise as valuations fall


Strong emerging market company names are significantly undervalued and ripe for investment, says Ross Cameron, portfolio adviser and analyst at Northcape Capital.

Cameron said he identified a subset of companies within the broad universe of emerging markets that are currently undervalued and offer stable future earnings prospects.

“I’m talking about very, very high quality companies with competitive advantage and long-term structural growth,” he said. “These companies today are really as cheap as we’ve seen since the middle of the GFC in mid-2008.”

Among them is Samsung SDI Company Ltd. The Yongin-si, South Korea-based company is a leading supplier of lithium-ion batteries, which are used not only in electric vehicles, but also in a wide range of rechargeable devices, including tools. electrical and medical applications. .

“It’s a structural game about clean energy,” he said. “We have the technology to generate electricity, but clean energy, renewable energy, tends to be intermittent. So we need better storage. And Samsung SDI, with its very large R&D budget and high technological advantages, is a very good beneficiary of this structural trend.

He also identified a number of emerging market banks, including Bank Central Asia in Jakarta, Indonesia; Banco Itaú Unibanco SA in São Paulo, Brazil; HDFC Bank Limited in Mumbai, India; and Grupo Financiero Banorte in Monterey, Mexico – which are well capitalized, have strong deposit allowances and are in countries with low short-term economic risk.

Cameron said these banks benefit from rising interest rates because their books’ liabilities (low-interest deposits) don’t revalue when rates rise, but their assets (loans) do.

“So what you get is net interest margin expansion, which is obviously positive for earnings,” he said. “And this is happening at the same time that these banks are at the absolute Goldilocks point of the credit cycle. They’re moving away from Covid, asset quality is improving, credit costs are coming down, and you’re also seeing an acceleration in loan growth as these economies improve.

He said the long-term appeal of emerging countries remains demographic, particularly in India, Indonesia and Latin America.

“You see strong population growth, a maturing population, and you have an even faster growing middle class that will support strong consumption,” he said.

Emerging economies are also increasingly seeing improved structural drivers such as urbanization, education and healthcare.

Regarding current economic conditions, he said major emerging markets are in a better position than their developed market counterparts, which relied on unorthodox monetary policies in the post-Covid era. By contrast, many emerging market central banks played the cards, rejecting short-term gains from quantitative easing and zero interest rate policies to keep inflation under control.

“Emerging market central banks have been proactive in raising rates. And so, going forward, they’re able to hold rates steady or even cut them, which is obviously going to be a tailwind for equities,” he said. “Central banks in developed countries – US, Europe, UK, Japan – have kind of been left behind and now need to aggressively raise rates to control inflation.”

He cited the example of Brazil, whose central bank rate began raising rates from 2% in March 2021 to 13.75% currently. Now facing inflation figures similar to those of the United States, its bond market is showing positive real returns, while US bonds are in negative territory in real terms.

Cameron said investor sentiment was stung by the strength of the US dollar.

“This is causing some concern for emerging market equities. Historically, a strong US dollar has been bad for emerging markets,” he said. “It certainly had an impact on the sentiment.”

He suggested that the US dollar appears overvalued on a number of metrics, and he thinks a bear cycle for the US dollar – which typically appears every eight years or so – is long overdue.

“We are very, very long in the tooth, very late in the US dollar bull market cycle,” he said. “We should be entering a multi-year US dollar decline, a US dollar bear market, like we saw in the 2000s. And when that happens, it tends to be a strong tailwind for stocks. emerging markets. »

Even currency risk can be mitigated by a very selective approach to emerging markets, he said.

“If you choose your countries correctly, it can actually be a tailwind,” he said. “Even in this very strong US dollar environment, for example, the Mexican peso actually appreciated. It has been rising against the US dollar since the start of the year.

Cameron thinks the US will almost certainly enter a recession in 2023, but he doesn’t expect a global financial crisis or even a very deep recession, but rather a mild technical version, with a few quarters of negative growth and a small increase. unemployment to curb inflation.

“Within emerging markets, we think countries like India, Indonesia, countries that have strong domestic demand, should continue to see good GDP growth over this period,” he said. he declares.


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without the contribution of the sponsor.


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