Based on positioning, valuations and growth, we believe EM equities are attractive on a risk-reward basis for long-term investors. Even though EM equities have been an unpopular and under-invested asset class and institutional investors are still generally underweight EM equities, their prices have dislocated from fundamentals and EM equities are positioned for a significant rally in the coming year.
Capex Cycle: The combination of steady DM growth, improving global trade and accommodative global interest rate policies create an attractive investment environment for EMs. After several years of declining global corporate capex growth which translated into negative demand for EM exporters, capex growth has pivoted back to a positive cycle. Re-inforced by a supportive credit environment, this recovery in spending should support top-line growth and margin expansion.
EM Consumption: We focus on the significant structural opportunity in the EMs – a rising number of EM consumers are set to transform the global economic landscape for decades to come and this presents a unique investment opportunity based on demographics, urbanization, spending patterns, and technological leaps. We believe that adjustments in spending patterns will lead to significant growth and eventual asset appreciation across EM equities.
Trade Resolution: Amid the hostile global environment intensified by the U.S-China trade conflict, President Xi and President Trump recently met at the G20 summit and agreed to a 90 day truce agreement, where the US would delay raising tariffs from 10% to 25% on $200bn worth of Chinese imports, with China set to purchase a “very substantial” amount of US products. Nonetheless, we do not expect US-China trade tensions to disappear; rather we believe they will de-escalate going into 2019. Conclusively, a de-escalation in the trade dispute between the US and China should act as a meaningful catalyst for an EM led rally in global equities.