The outlook for emerging market equities is positive for Mike Jennings, London-based senior investment strategist at TT International, who believes that last year’s headwinds for the asset class have dissipated.
“Trade tensions are easing off substantially. We also expect that the rise of the US dollar last year will moderately drift lower, which should be good for emerging market outperformance,” he told FSA recently.
In fact, his outlook for emerging markets is that they will outperform developed market equities, including the US.
He explained that historically, whenever the gap of economic growth between emerging and developed markets widens, emerging markets outperform.
His optimistic outlook is based on a widening gap in economic growth this year.
“If we look at 2019, developed economies had 1.6% growth and emerging markets were at 3.5%. This year, developed markets are expected to grow by 1.4% based on World Bank estimates, and emerging markets are expected to re-accelerate at 4.1%.”
In addition, he believes that emerging markets have more room to cut interest rates in 2020 than developed markets, given that bond yields in developed markets have gone negative.
“Positive rates in the world are very much geared to emerging markets, so they have the most latitude to be able to cut rates in 2020.”
However, Jennings warns investors not to expect the same kind of returns last year.
“Emerging markets will generate reasonable positive returns, but probably not matching the 15% gains in 2019,” he said.
Positive on India
TT International has two emerging market strategies: the TT EM Unconstrained Fund and the TT Emerging Markets Equity Fund. Both are managed by Niall Paul and Robert James, according to Jennings (the funds are only available to professional investors in Hong Kong and accredited investors in Singapore).
Both follow the same strategy, but the unconstrained product is more concentrated with 45 names, while the equity fund is more “core” with 60 names.
While both portfolios have a bottom-up stock selection process, in which the managers prefer growth companies with reasonable valuations, a top-down layer is added, Jennings explained.
“What we aim to do within our process is to tie together the top-down tailwinds with the bottom-up stock selection,” he said.
For example, one of the key markets that the firm is positive on is India, which has been snubbed by other asset managers. UBP, for example, is not positive on the market as both its currency and the domestic economy have weakened. Blackrock emerging markets manager Gordon Fraser, meanwhile, is underweight India as it is “vulnerable to a credit crunch”.
TT International’s Jennings acknowledged that India’s domestic economy has slowed. However, he believes that the slowdown was caused by several reforms made by the government, which should be positive longer-term.
“We are bullish on the reforms made by Prime Minister Modi. They may have been negative in the short-term, but we think that there will be positive growth as we move forward,” he said.
One example is the goods and services tax, which was implemented in 2017.
“Of course, that is negative in the short-term because it caused disruptions to businesses. But it should be positive for earnings longer-term and that also means more efficient tax collection for India,” Jennings said.
Another reform is the real estate regulation act (RERA) in 2016, in which real estate developers were more regulated with the aim of protecting home-buyers and real estate investors.
“This constrained the cash flow of property developers. But this is a good growth opportunity for high-quality property developers as low-quality players were slowly put out of business,” he said.
India is one of the largest overweights in the firm’s EM Unconstrained Fund. It accounted for 17% of the portfolio in December versus the 8.6% in its benchmark index, according to the fund factsheet.
TT International’s emerging market strategies versus their benchmark index and sector in Singapore
