For investors with an appetite for EM equities, looking beyond Asia is more than justified by the larger universe for the discovery of mispriced companies – and diversified returns over the long term.
Allocating outside of their region might not seem as compelling on the surface to Asian investors who already have exposure to local equities. Notably, Asia already accounts for nearly 80% of the MSCI Emerging Market Index, although China comprises a big chunk of this exposure.
Yet Eastspring Investments sees instances where markets in regions such as emerging Europe, Latin America and the Middle East and Africa have delivered strong returns.
“Opportunities shift across geographies over time,” said Samuel Bentley, client portfolio manager for equities at the firm. “Our quest to identify the most promising companies within the global EM often leads us outside of emerging Asia.”
Getting more from the mix
Diversification is a key driver behind such a global focus.
While Bentley explained that China has historically been an important part of EM – and will remain so – he sees its influence is tapering. “This potentially creates more idiosyncratic and diversified opportunities for bottom-up stock pickers,” he added, pointing to the individual macro, policy and market characteristics of each emerging nation.
As a result, global EM can offer opportunities in sectors which are under-represented in Asia.
For example, while financials and technology are a big part of the MSCI AC Asia Index, the materials and consumer staples sectors have higher weightings in the MSCI EM Latin America Index and communications and energy feature more prominently in the MSCI Emerging EMEA Index.
Eastspring has also found that equity markets in Japan, Indonesia, China, Malaysia and Thailand have the lowest correlations, at <0.6 to the MSCI EM Index. “A broader global EM allocation can provide significant diversification to investors from these countries,” added Bentley.
At the same time, he said the higher market volatility of some of the emerging regions outside Asia lends itself to an investment process that looks beyond the noise and is fundamentally focused.
A structural boost
Further scope for global allocations comes from structural trends like decarbonisation. Given this will impact countries in different ways, investors need to be positioned across all EM to take advantage of the opportunities and to navigate the challenges.
For example, while emerging Asia benefits from the transition to a low-carbon economy, selected EM globally also have unique advantages which can translate into a promising investment.
“An exposure to the commodity-rich countries within Latin America and the EMEA regions can potentially provide some buffer in periods of rising commodity prices,” explained Bentley.
Shifts in the global supply chain and the desire for greater supply chain resilience also bode well for countries like Mexico, he added. “Its proximity to the US, its robust manufacturing capability and ample labour make it an ideal near shoring candidate for US companies.”
Further, Eastspring sees Latin America as an increasingly attractive destination for foreign investment due to its reserves of lithium and copper, key inputs for electric vehicles and renewable energy.
In Europe, meanwhile, the competitive manufacturing bases in Poland, Hungary, Czech Republic and Turkey are likely to attract nearshoring opportunities, especially from the advanced European countries, added Bentley.