Emerging markets: Investing beyond the dragon's reach

Discussing the quarter that was in emerging markets equities and more.

Transcript

Tom Harvey

Hello, I'm Tom Harvey from abrdn, and you're listening to the Emerging Market Equity Quarterly Podcast, the show that looks at what happened in the most recent quarter and provides our outlook for the asset class. Today. I'm pleased to be joined by my colleague Nick Robinson, senior investment director and deputy head of our emerging markets team. Nick, welcome to the podcast. It's great to have you on. 

Nick Robinson

Thanks, Tom. It's a great pleasure to be on. Thank you. 

Tom Harvey

Great. So we'll cover a few things today. We'll look at what we saw in the most recent quarter, what kind of an effect that had for our strategy. And then we'll wrap up with some outlook. So if you could start us off with what we saw in this most recent quarter. Nick, that would be great. 

Nick Robinson

Yeah, sure. Well, I think there were probably three things I'd highlight in terms of, important influences on markets this quarter. Firstly, there was quite a lot of action in the tech sector. So I think one thing we've seen this year, in fact, has been really a broadening of a rally in the tech sector that we saw last year.

So, you know, last year it was all about the, you know, big index kind of US kind of darlings of the AI industry that were really driving the rally. And as much as that's continued to some extent, what we've seen in emerging markets this year and particularly last quarter was a really real broadening out of that rally. So we've started to see more companies in the AI supply chain benefit from the demand for AI chips.

And we've also seen companies now in more peripheral areas like, cooling and switches, for instance, start to do well on that. So, so a lot of money has been flowing into that investment theme and, you know, flowing into more kind of adjacent businesses. you know, secondly, I think I'd probably just highlight that China has, you know, continued to be a market where there's been a bit more optimism in the second quarter, although this year that optimism is petered out a bit towards the end of the second quarter.

But certainly there was a large stimulus announced within the property sector, which got the market quite excited given the nature of that stimulus and the potential for the properties, the stimulus to feed into, consumption more generally. So we saw the China market, you know, do a little better in the second quarter, outperforming the, emerging market benchmark by a couple of percent.

And it's been a while since China performed well. So I think that was quite notable. and then I think the third thing worth highlighting is just the number of elections that we've seen, in emerging markets this year. And the second quarter kind of continued that pace with quite notable elections in South Africa. Mexico and India

And I think, you know, the Mexican and Indian ones were both, you know, significant in, in their own way. And that in Mexico we saw a strengthening of the ruling government party such that they ultimately won a supermajority, which gives them quite a lot of constitutional power in terms of being able to amend the Constitution, and the investors got a little bit nervous about that in terms of what they can do to move more populist and, you know, potentially put in measures that may be unfriendly to corporates in terms of judicial reform.

So, so that's something that was a bit of a concern. then on the other hand, India was quite an interesting one because if the election came out, you know, a bit negative for Modi versus expectations, his support within the rural economy weakened. And so the market sold off on that initially as it was felt that, you know, maybe his reforms, would be dealt a blow, but actually subsequently, he formed a coalition party and the market has continued its upward march, which it's been doing for the last 18 months or so.

So I think, Tom, these are really the main things I'd highlight. 

Tom Harvey

Great. Thanks for that, Nick. So, you know, looking at a period where there was maybe some volatility around some of these elections, what did this mean for our strategy and how did we fare? 

Nick Robinson

Yeah. So as I mentioned the market was up about 5%, in the quarter. The strategy was a bit behind that, about 4%. So a bit of a mixed bunch, really. yeah. You'll be aware the strategy is quite heavily overweight. the technology sector and semiconductors in particular. So that added a bit of relative performance, about 60 basis points or so from that. And particularly, you know, coming through in terms of Taiwan, you know, a lot of the companies that the strategy owns, which are exposed to AI, are based in Taiwan.

So the Taiwanese market was up 15% in the quarter, the best performing index. so sort of strategy did okay on the back of that. yeah. It also did okay on the back of its Indian positioning as well. So India was up 10%. we got about 40 basis points of relative outperformance from that. And their what we've seen is a continuing, strength.

And a lot of the investment plays within India. So yes, for property market continues to be quite strong. Those companies that feed into that supply chain of continue to do quite well. And the portfolio is reasonably heavily positioned there. I would say where the strategy, failed to do well was within China and within the China exposure.

And this has been an issue for, for a little while in that we've seen a real or we continue to see a rotation in China, away from high quality growth stocks towards more value stocks. And that very much continued in the quarter. And the strategy tends to be quite underweight. Value stocks for mostly quality concerns. So they've got a big value stocks in China things like the state banks which you know we shy away from given how they're used as tools of monetary policy rather than front in the interest of shareholders.

So, so that positioning cost the strategy quite dearly, about 1.4% of, of relative underperformance. So you can see that. yeah, that was the, the, the dominant factor behind the underperformance of the strategy in the, in the quarter. Yeah. Elsewhere there are a couple of other factors as well which, which weighed on performance. So Indonesia, you know, market where there was another general election earlier this year.

Yeah. We saw a surprise hike in interest rates, which, you know, caused some weakness to the FX rates in Indonesia and also meant that the banks, sold off, to their strategies, overweight Indonesia. So, so that cost about 70 basis points. And then Latam, was quite weak. You know, Latam is, an overweight position to the strategy.

Yeah. The main issue there was was Mexico. So on the news of the, Mexican election and the outcome, we saw quite a sharp sell off in both the Mexican stock markets, and also the Mexican currency. So, you know, that cost the strategy about 60 basis points. 

Tom Harvey

Thank you for that. Nick, I think we'll take a look down at a quarter that was, at least from an absolute standpoint, a fairly good one for emerging markets and kind of turn our eyes forward to, what we see as we enter and move through the second half of the year.

So if you can give some thoughts around, our outlook for the rest of this year, that will be great. 

Nick Robinson

Yes. I think, you know, going forward, yeah, we still see a reasonably positive, positive outlook for emerging markets. Certainly. You know, the, the more cyclical factors around emerging markets continue to be you fairly supportive. yeah. We're still expecting the fed to cut interest rates this year, which should provide cover for allowing emerging markets, central banks to start cutting rates.

 And as you know, that's been, you know, delayed a bit. So, you know, this catalyst that we've been expecting to occur has been pushed out. And that's probably, you know, weighed on emerging markets a little bit. But yeah, that's still very much forecast to occur at some point. So that's cyclical factors is still in pretty good shape.

 And as I mentioned earlier, you know we're getting through a pretty through a hefty round of elections in in Am certainly you know 2024 is a historic year for elections globally with over 60 countries voting and, and as we go through them. Yeah. As much as there's been surprises in the manner the parties have won, there hasn't been anything, perhaps with the exception of Mexico, that has been hugely concerning.

 So I think as we continue to go through this volatile period, you know, elections are something to watch out for. But yeah, we've had the major ones, perhaps with the exception of the US, which, you know, it's going to have some quite big implications on, emerging markets. And so that's probably one of the things we need to watch this year.

Certainly Trump being elected. potentially, is going to lead to higher tariffs, as he's been quite clear on that. And certainly, China is in the crosshairs of those higher tariffs. So yeah it could be some risk there as we move forward. But certainly one thing we've seen that is still very supportive of emerging markets, as we have continued to see, increases in global CapEx and increases in global CapEx tend to be correlated with emerging market outperformance.

And the drivers of the CapEx increase we're seeing are things like the technology revolution or the technology investments associated with artificial intelligence. Yeah, that's very firmly underpinned. you know, there's near shoring, which if anything, it's likely to accelerate under a, you know, a second Trump government if he does, introduce even more tariffs. and then finally, there's the green commodity, angle to, the long term outlook.

And that still remains very, very strong. And in fact, in the second quarter, we continue to see more evidence of, supply tightness within the copper market, which really buoyed the price of, of copper stocks. And that's a part of the portfolio that's, where we're relatively heavily positioned. So we think, you know, going forward for long term outlook is still pretty good. Yeah with perhaps a few potential bumps in the road driven by the pace of fed easing. And also for US election and the implications that could have. 

Tom Harvey

Great. Nick, thank you very much. that feels like a good place to bring this podcast to a close. And once again, Nick, I just want to thank you for joining us today.

 Nick Robinson

Great. Well, thanks, Tom. It's been a pleasure. 

Tom Harvey

Great. And for everyone who took the time today to listen in, we really appreciate it. If you enjoyed today, then please download our other podcasts from our website or wherever you may normally get your podcasts.

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