Emerging Markets Equity Outlook

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Pandemic Clouds the EM Outlook

Emerging markets have rallied, but at a slower rate than developed markets. Latin America hasn’t convincingly flattened the curve, and Mexico and Brazil are two of the world’s most concerning virus hotspots. Because emerging markets tended to impose more restrictive measures in mid-March, questions remain about the pace of the region’s return to normalcy. It’s possible the coronavirus could linger longer than most experts originally projected and disrupt global economic activity far longer than we thought.

On the positive side, as China brought the pandemic under control, relaxing its restrictive measures led to a pickup in economic activity. Though the normalization in production outpaced consumption, China’s V-shaped recovery appears to be on track. We remain positioned in businesses that support the shift toward more online activities, such as shopping, and platforms for work and consumer services, such as education. Lessons learned from the virus outbreak should intensify demand and investment in these areas.

More broadly, we believe the compelling long-term case for EM equities is intact. The emerging consumer class continues to grow and assert its demand for quality of life improvements. Equity valuations and earnings growth rates across the asset class continue to be attractive relative to developed markets. Fed policy has resulted in a weakened U.S. dollar, which historically supports EM currencies. Extremely accommodative central bank policies across the global should continue to support EM currencies and increase economic growth.

Even though some emerging markets may lag developed markets in returning to more normal economic and consumer activity levels, we believe the long-term case remains intact. We’re focused on companies exposed to stay-at-home trends and those exposed to local consumers.

U.S.-China Tensions Are Rising. Again.

Exacerbated by the impact of the coronavirus outbreak, U.S. distrust of China has reached a new level. Leaders on both sides of the congressional aisle want to fundamentally reexamine the U.S.-China economic relationship. Meaningfully addressing that relationship will likely be a top priority for the president and Congress regardless of the November election’s outcome.

The confrontation has expanded beyond trade to now include technology, export control and prohibitions on U.S. companies doing business with Chinese companies such as Huawei. There are also financial tensions around investment restrictions on federal pensions and restricting Chinese companies on U.S. exchanges. Geopolitical conflicts relate to Hong Kong and the South China Sea. At the same time, China claims the U.S. is taking advantage of its policy allowing U.S. companies access to the Chinese domestic market. It has threatened to counter any U.S. measures with similar economic penalties and warned the U.S. to stay out of its internal affairs.

Various economic and political crises have pressured emerging markets over the last few years, and many of them weighed on returns in the short-term. Note, however, that this asset class has managed to rise above these short-term headwinds to reassert its attractive investment case.

We’re monitoring the U.S.-China relationship, which is reemerging as a potential source of volatility as the U.S. election season ramps up. 

Q3 2020 Investment Outlook Resources

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

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