For individual investors in the UK

EM equities set to strike a balance between growth and valuation

Portfolio Manager Daniel Graña’s 2023 outlook explains why it’s not too early for investors to look through near-term headwinds to uncover durable secular themes, such as innovation, present in emerging markets.

Daniel J. Graña, CFA

Daniel J. Graña, CFA

Portfolio Manager, Emerging Market Equity


30 Nov 2022
5 minute watch

Key takeaways:

  • We expect developed market monetary policy, U.S. dollar strength, and China’s COVID-19 strategy to dictate the near-term trajectory of emerging market (EM) equities.
  • As these issues are resolved, investors will likely discover that EM stocks presently offer the potential for steady earnings growth at attractive valuations.
  • The next stage of EM earnings growth will be increasingly driven by innovative companies that seek to provide solutions to EM-specific business challenges.

Daniel Graña: After a very complicated 2022, investors are naturally asking, “What about the outlook for 2023 in emerging markets?” Unfortunately, some of the leftover issues from 2022 are still sort of haunting us in 2023. I think for a sustainable rally to occur in emerging markets, we need some resolution on some of these issues. The first one is the trajectory of Federal Reserve interest rates and the resulting impact of the dollar. We have seen some tentative signs that U.S. inflation perhaps is peaking, but until the market gets a good sense on the grasp on where interest rates are going to top, it’s going to be hard for the riskiest of asset classes to get comfortable that it’s time to rally.

The second is China policy pivots. Zero-COVID policy and the property market have acted as constraints on China growth and acted as constraints on the China equity markets and, given that China is roughly a third of the EM benchmark, as a constraint on the emerging market equity index.

So, again, to the extent that we get some clarity on these issues, we’ll have a better 2023. We have again seen some tentative signs. The government has begun to finally step in to stabilize the property market. The government has sort of hinted about changing the zero-COVID policy. For example, we have seen some recent media reports about maybe Omicron isn’t so bad compared to Delta. They’re beginning to prepare the population to perhaps move to what the rest of the world has come to, which is learning to live with COVID.

Another key issue to worry about leading into 2023 is the depth of the developed market recession. We know that much higher commodity prices are sapping the consumer in Europe, even affecting the consumer here in the U.S. But as we start to see some clarity on the first two issues, I think that we have grounds for being more optimistic about 2023.

As we head deeper into 2023, I think what the emerging market offers is very attractive growth at very attractive valuation. Not all countries are going to do well in 2023; not all companies or sectors are going to do well. But I think that the setup is very interesting for the back half of 2023 as we sort of resolve some of these more near-term issues.

The ‘innovation’ opportunity in emerging markets

Historically, the investment case for emerging markets centered around convergence and outsourcing. Outsourcing is, “We build things cheaper, better, faster.” There are very successful business models in that vertical in emerging markets.

But increasingly there is a third reason to invest in emerging markets that’s less pro-cyclical, and it’s called innovation. Now in the past, we in emerging markets played a bit role in making widgets for the supply chain, or we had to wait for innovation to lap at our shores. But increasingly there are companies in emerging markets that are using technology in ways that solve the age-old EM inequities in healthcare, in financial services, in the consumer experience, and so forth. Leveraging off very interesting platforms – blockchain, digital currency, AI – in ways that perhaps are not thought of in developed markets because they are very EM-specific issues that this hopes to tackle.

There are companies that use blockchain to solve the small- medium-sized business lack of funding in China. If you digitalize the entire supply chain, you have confidence in the state-owned enterprise banking system that they’re actually not taking SME risk – small- medium-size business risk – but they’re actually taking larger SOE [state-owned enterprise] risk, given that you can see the transparency on the contracts. They will then lend at much lower rates.

Another company would be one that’s digitalizing the healthcare space in India. We know that today there’s unequal access to clinics and hospitals. What can help solve that? Telemedicine. In Mexico, almost two-thirds of Mexicans don’t have a bank account. They’re not taking advantage of the formal banking system. What can help solve that? Fintech. So whereas incumbents are either unable or unwilling to target these sort of people who are not currently banked, Fintech can help solve that problem.

For all those reasons, we are quite excited about what innovation represents in emerging markets.

Market GPS

2023 Investment Outlook:
Finding the silver lining

GPS Map

IMPORTANT INFORMATION

Technology industries can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants, and general economic conditions. A concentrated investment in a single industry could be more volatile than the performance of less concentrated investments and the market as a whole.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

Marketing Communication.

 

Glossary

 

 

 

Important information

Please read the following important information regarding funds related to this article.

The Janus Henderson Fund (the “Fund”) is a Luxembourg SICAV incorporated on 26 September 2000, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets. These transaction costs are in addition to the Fund's Ongoing Charges.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • The Fund may invest in China A shares via a Stock Connect programme. This may introduce additional risks including operational, regulatory, liquidy and settlement risks.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a hedged share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Daniel J. Graña, CFA

Daniel J. Graña, CFA

Portfolio Manager, Emerging Market Equity


30 Nov 2022
5 minute watch

Key takeaways:

  • We expect developed market monetary policy, U.S. dollar strength, and China’s COVID-19 strategy to dictate the near-term trajectory of emerging market (EM) equities.
  • As these issues are resolved, investors will likely discover that EM stocks presently offer the potential for steady earnings growth at attractive valuations.
  • The next stage of EM earnings growth will be increasingly driven by innovative companies that seek to provide solutions to EM-specific business challenges.