Ian Beattie, lead portfolio manager of Nedgroup Investments' Emerging Markets Equity fund, talks to Investment Week about China, Covid-19 and asset allocation during crises.
Throughout the pandemic, what have been the points of divergence between emerging and developed markets?
Emerging markets have not behaved in the same way as developed markets. Since the start of 2020, developed markets' quality and growth have led the way, especially in the tech and health sectors.
Quality in emerging markets has not performed as well, partly as a result of some of the staples that have not done well, especially in India.
Are there any EM countries which you think have been noteworthy during this period, and what is your outlook on them in the near term?
In terms of performance by countries, China's response to Covid-19 was eventually draconian, but it is now coming out of the crisis relatively quickly. Factories are back up and running, restaurants are open.
However, productivity is not as high even though everyone is back at work because of distancing and other rules.
Brazil, where we were underweight, was doing very poorly in the early part of this crisis. However, as we are starting to take some profits in other countries, we are now reassessing these early poor performers and looking for buying opportunities in the highest quality stocks.
Looking forward into the coming months and years, what is your outlook on emerging markets generally?
Faster money growth in the US than elsewhere is relieving the US dollar shortage, raising the prospect of decline in the US currency - the icing on the cake of a bullish EM scenario.
US annual broad money growth reached 25% in early May, a post-WWII high.
We suspect that, contrary to after the Global Financial Crisis, strong broad money growth will be sustained, reflecting central bank financing of fiscal deficits and a relaxation of regulatory constraints on commercial banks to encourage them to lend to support the economy. This would suggest an extended economic boom and medium-term upswing in inflation.
How did you arrive at this outlook, and what general criteria do you have for picking your stocks?
For almost three decades, we have been using a seven-factor checklist for assessing the relative attraction of emerging market equities, and it is now giving the most positive message since 2016.
As well as plentiful liquidity and improving economic prospects, EM relative valuations are cheap, earnings estimates are holding up better than in developed markets and non-oil commodity prices are recovering.
Your sentiment sounds quite optimistic - can you explain why in a bit more detail?
Excess liquidity in the global economy is the greatest since the end of the Global Financial Crisis, which is expected to drive a V-shaped economic rebound as pandemic containment measures are eased with associated strong performance of cyclical assets, including emerging market equities.
Excess liquidity can flow into the economy, boosting activity, or asset markets, boosting prices. Both are likely. Assuming virus containment via a vaccine or effective test and trace programmes, we expect 2021 to be a boom year for the global economy, with GDP more than reversing crisis losses.
Strong economic performance will result in money flow into markets being directed towards cyclical assets.
We note that annual growth of broad money in the G7 economies rose to 13% in April, the fastest since 1976. Money growth has also picked up in China and is surging in other emerging economies, including Korea, Russia and Brazil.
We estimate that a double-digit percentage gap has opened up between the global stock of money and the demand to hold money by households and firms - the largest since 2009.