The emerging markets investment story has suffered in recent years, not helped by the sharp rise in global borrowing costs – often based in US dollars – since the end of the pandemic. Some of the old euphoria has gone. But the sector is due for a comeback. Our correspondent in the US has listened to what fund managers have to say.

(Main picture: Left: Christopher Lees, Snr, portfolio manager, J O Hambro; Right: Sherry Zhang, portfolio manager, analyst, Barrow Hanley.)

Emerging markets haven’t exactly been Wall Street darlings for the past decade. According to the MSCI Emerging Markets Index, the total annualized 10-year return for emerging markets ending last month was only 4 per cent.

But EM may be due for a reversal of fortune sooner rather than later, according to fund managers speaking at a recent press briefing on geopolitical investing risk in New York. 

Emerging markets have gone through a “painful rebalancing” over the last 10 years, hindered by headwinds resulting from a strong dollar, said Paul Wimborne, senior portfolio manager for J O Hambro Capital Management. 

But the possibility of a weaker dollar, combined with an expected stimulus program from China and cyclical improvements have greatly improved emerging market prospects, according to Wimborne.

“Emerging markets look very attractive right now,” said Sherry Zhang, portfolio manager and analyst for Barrow Hanley, an investment management firm owned by Perpetual Asset Management, which also owns J O Hambro. A Chinese stimulus initiative would be beneficial to other emerging markets that trade with China, in addition to boosting the country’s domestic market, Zhang noted.

EM’s "dirty little secret"
The “dirty little secret” of emerging markets is that returns  are more often than not “cyclical in nature,” said Christopher Lees, senior fund manager for J O Hambro. Successful EM investing often comes down to whether the country is on the right or wrong track, Lees said.

Individual companies in emerging markets can get a bad rap simply by getting caught in a market-wide downdraft or the wrong country, said Damon Gough, head of intermediary markets, Americas, for Perpetual. 

There’s been a “disconnect” between actual performance and market perception for selective EM companies in the travel, consumer goods and tech markets, Gough said. But valuation for those companies is beginning to catch up “on a relative basis,” he added. 

Hot spots
So where should international investors look?

China looks especially attractive if the government signals a move to stimulate the economy, the fund managers agreed. The actual numbers “are not that important,” Wimborne said. “It’s more the intention.”

Even now, China’s emerging prowess as an electric vehicle manufacturer has been impressive, Lees said. He cited BYD, China’s biggest automaker, which posted its fourth straight month of record global sales last month. Earlier this year it vaulted past Volkswagen as the top selling carmaker in China.

What’s more, Lees pointed out, BYD has just unveiled a plug-in hybrid car that is the size of the popular Toyota Camry which can travel approximately 1,300 miles with one charge and a full tank, but sells for $10,000 less than a Camry at $14,100. It’s an example, he said, of why Hambro is excited about international companies that are “different.”

Meanwhile, India, which has outpaced China in recent years, now “looks overvalued to us at the moment,” Wimborne said. Gough agreed, adding that Perpetual is now “underweight in India and overweight in China.”

Interest in European investments has slumped in recent years, but growth can be found in private equity firms, healthcare companies and forward-thinking companies like French-based Schneider Electric, which specializes in digital technology applied to electric grid upgrades, according to Lees. “If the US is going all in on artificial intelligence, it will need to upgrade the grid,” he added.

Overall, emerging market investors should be as liquid as possible, Wimborne said, and be prepared to move money around “in a timely manner.” EM investors should also consider having more than one manager for different perspectives, Gough said.

As for international geopolitical risk, there will be “a lot less political uncertainty” once the US presidential election has been decided, Lees declared.