The global economy has rebounded from the coronavirus pandemic since September last year, but the recovery path was different from that experienced in the last decade, Eastspring’s global emerging markets equity team argues.
It believes the road to further recovery will be similar to the early 2000s, which will favour the long-term outperformance of value equities, rather than quality and growth stocks.
“Most EM equity strategies do not appear well-prepared for this scenario. Many of these strategies are still biased towards expensive technology and new economy themes when value today is represented more clearly in the cheaper real economy sectors such as financials, industrials, and utilities,” said Eastspring.
In the past few months, Eastspring has noted a strong trend in earnings revisions, with more upgrades than downgrades across most sectors. Cyclical sectors, such as energy, materials and banks, have done better than the world’s average.
Yet, value stocks in EM remain comparatively cheap, while growth and quality equities are “extremely overpriced…thus constituting a strategic opportunity for value equities investment, according to the Singapore-based asset manager.
The popularity of quality and growth names has been driven by the digital revolution, which saw companies, governments, and consumers building and integrating software and digital platforms.
However, while digitisation remains an important trend, the decarbonisation revolution will be the next investment theme driving investments in the 10 years to come, said Eastspring.
“This will require massive infrastructure and capex investments in the real economy, as consumers and companies shift away from high carbon consumption.”
Moreover, tech giants in the ecommerce and internet-related business, which have been less regulated in the past years, are facing risks of increasing scrutiny from the government. Eastspring believes this could put them on a level playing field with existing businesses and moderate their growth rates going forward.
“The future is inherently uncertain, but if we are right on the likely shape of the economic recovery and the equity markets’ reaction to it, there remains a very large opportunity for a disciplined value investor to capture. Investors in EM equities should be hedging this risk with a disciplined value approach,” said Eastspring.
