Strong growth in emerging markets outside of China
Why emerging markets now?
Introduction
Investment opportunities in Asia ex China
Asia emerged out of Covid-19 stronger. Early signs of recovery were evident from rising industrial production and retail sales while mobility recovered close to pre-Covid levels in late 2020. We see this momentum accelerating throughout the rest of 2021 as the global economy recovers supported by
re-openings and positive vaccine developments.
South Korea and Taiwan should see a continued economic rebound led by export growth on the back of robust demand for technology hardware. Despite being harder hit by the pandemic, we also see significant potential for India’s economy as structural reforms under Prime Minister Narendra Modi bear further fruit. Among other initiatives, the country’s Make in India 2.0 initiative calls for more private capital and foreign direct investment as well as the opening of agriculture and lower taxes for manufacturers.
In the ASEAN region, we believe these economies will benefit from supply chain diversification away from China, robust FDI flows and the recovery
of global travel. We have identified several themes within Asia ex China
that will likely outperform, including technology hardware and supply
chain diversification.
John Malloy and James Johnstone co-manage the RWC emerging and frontier markets team. The team is composed of a further 18 analysts, economists and strategists based in Miami, London and Singapore, many of whom have worked together for over twenty years. The team joined RWC Partners in 2015 and now manages
c.$12bn for its clients. Emerging and frontier markets represent the fastest growing countries in the world. The RWC team believes the continued growth in these markets represents opportunities across a range of industries.The highly experienced and dedicated team takes an index-agnostic, opportunistic approach which allows it to explore investment opportunities that are often off the beaten track.
The team
Download the report
CLICK FOR DISCLAIMER
For more RWC content >
China has been one of the world’s most exciting economic success stories over the last three decades. However, its meteoric rise has partially obscured some remarkable achievements in the 26 other MSCI emerging markets which offer a wide range of compelling investment opportunities. These emerging economies remain key drivers of global growth. From North Asia to Latin America, some of the world’s most innovative companies continue to prosper and have a unique opportunity to leapfrog traditional channels enabling faster and more sustainable growth.
There are well over 1,000 listed companies across these markets which remain under-owned. Importantly, emerging market valuations are at attractive levels especially relative to developed markets. Across the regions, several of our key thematic trends look set to outperform: commodities, financial inclusion, technology hardware and supply chain diversification.
The rising penetration of internet connectivity, 5G smartphones and new auto technology has led to solid demand for technology hardware across the value chain. The Covid-driven work-from-home phenomenon has increased demand across the technology industry and is set to be the new normal rather than a one-off event. Technology hardware companies will continue to benefit from supply chain bottlenecks for semiconductors, memory chips, passive components and other technology components. Autos will be a key source of semiconductor demand as the advent of electric vehicles and autonomous control will drive up the value of technology content per vehicle.
SK Hynix is the world's second largest memory producer by capacity and sales as well as the third largest semiconductor company. Driven by solid demand, we expect robust industry growth for both DRAM and NAND memory. However, the supply dynamics of the industry have never been more disciplined. The DRAM industry has consolidated to only three major players (Samsung Electronics, Hynix and Micron) from over ten just a few years ago. Investment and capital expenditure are more measured while Covid-related supply-chain bottlenecks and chip shortages across the supply-chain are expected to continue. Both DRAM and NAND pricing have started to inflect higher. The forthcoming upcycle should drive upside for both revenue and margins for pure-plays like SK Hynix.
Technology hardware
A recovery in global GDP, Covid-19 related stimulus, low interest rates, reduced supply and a weak dollar provides a positive backdrop for commodity prices. Copper, oil, gold, silver and agricultural commodities make up the majority of the EMEA region’s exports. We believe that this is a rare moment in time during which we can invest in a global, secular opportunity that coincides with a strong cyclical tailwind.
Since more than 70% of global carbon emissions are driven by energy consumption, a green future will be directly connected to the broad development of an efficient, clean energy grid. The development of a greener energy network cannot exist without a substantial increase in the use of certain metals. Copper is one of the key beneficiaries of the electrification of the global economy whether through the production of electric vehicles or the electrification of industries and is crucial in the construction and build-out of renewable energy.
Africa is the second largest copper-producing region globally. As such, the copper-producers across African countries and the companies operating within them will play an important role in the global green transformation over the coming decade.
Commodities
Estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.
Chart 2: Cost contribution of automotive electronics and semiconductor content per car
Source: RWC Partners, Bloomberg, Deloitte and IHS as at 30 March 2021
‘A weaker USD strengthens balance sheets in EM, particularly for those with higher external debt ratios, and further eases financial conditions’
... may cause the MSCI EM Index to rise by
1.2%
Weakness in the
US dollar ...
1%
Chart 1: MSCI Emerging Markets ex China Net Return Index
Source: RWC Partners, Bloomberg as at 25 March 2021
Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.
Source: RWC, Tellimer and Bloomberg as at 26 February 2021. Based on the latest information available.
Chart 3: New factories of the world to benefit from the relocation from China
The names shown above are for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.
The diversification of supply chains was already underway pre-Covid following the Trump trade war in 2018. US imports from China dropped by 17% (US$88bn) in 2019. Intra-Asia trade increased fourfold from 2000 to 2017 compared with growth in global trade of only 2.8 times.
China’s share of exports in labour-intensive manufacturing has recently declined as production shifted to other markets. Lower labour costs and improved infrastructure have made South East Asia a leading alternative for outsourced manufacturing, especially Vietnam. Geo-political considerations such as US-China sanctions and ESG requirements will likely accelerate the diversification of the current Sino-centric supply chain. Furthermore, Covid-19 and the potential for pandemic-related supply chain bottlenecks will be an additional risk to address via diversification.
The next generation of Asian economies have a chance to attract investment in labour-intensive manufacturing industries drawn by tax incentives, inexpensive and young labour forces and steady Covid-19 responses. Neutral geo-politics are a key draw for relocating firms while high industry utilization offers the potential for a quick relocation. Chinese firms are often at the forefront of FDI into these new manufacturing areas as they too want to remain cost competitive.
Hoa Phat Group is the largest steel manufacturer in Vietnam with a market share of 32.5%. The company has seen robust sales volumes while it continues to ramp up the Dung Quat Steel complex expansion facility. We see the improvement in cash flow to translate through for the company in 2021 and 2022. Hoa Phat Group is set to be a key beneficiary from the increased demand for infrastructure needed to build out the manufacturing hubs.
Supply chain diversification
Fundamentally, the outlook for the EMEA region remains positive. We estimate that rising commodity prices will lend support to current account balances and foreign exchange rates while increased flows into local equity markets should continue to drive share prices going forward. We have identified two key themes in EMEA that we believe will outperform over the long-term: Technology disruption and commodities.
Investment opportunities in EMEA
Technology disruption continues to be a key area of focus in EMEA due to a low but fast-growing user penetration in most segments of the economy such as e-commerce, ride-hailing and food delivery. Growth in these segments are supported by a highly skilled local talent base and high smart phone penetration across the region. We believe that the region is in the early
stages of technological disruption in contrast to its maturing impact in other regions globally.
Yandex, a technology company in Russia, is the search leader in the country with c. 60% market share and the first ride-hailing company to become profitable in 2019. Yandex’s growth profile remains attractive due to its launch of new features such as Yandex.Video, Yandex.Cloud and Zen, a news aggregation service. Structural tailwinds such as the rising share of digital channels in Russia’s advertising market should continue to support the company’s earnings. In e-commerce, Yandex bought out its partner, Sberbank, during 2020 and is integrating the acquisition into its ecosystem at a time when e-commerce in Russia is seeing an inflection point in terms of growth. Yandex is also one of the global leaders in driverless car technologies which could be a crucial component of future transportation services. Furthermore, it continues to develop new verticals such as food and grocery delivery.
Technology disruption
Source: RWC Partners, Bloomberg, Morgan Stanley 31st January 2021
Chart 4: E-commerce is Under-penetrated in MENA
The names shown above are for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.
Chart 5: Bloomberg Commodity Index
Source: Bloomberg and RWC as at 6 April 2021
First Quantum Minerals is a mining company in Zambia that produces copper as well as other metals such as nickel and gold. We believe that First Quantum Minerals will benefit from the constructive outlook for copper. The demand side remains supported by secular growth in the electrification of the world economy while decreasing ore grades, lower inventories and tight mine supply will likely support the price from a supply perspective.
In addition to copper, we wrote about our outlook on precious metals (found here) which we believe will benefit several African gold and other precious metals companies: Anglogold Ashanti, Goldfields, Sibanye-Stillwater and Endeavour Mining. We have a constructive outlook on the prices of precious metals and believe the valuations of these miners are at very attractive levels.
Chart 6: Africa is an Important Source of Copper
Source: RWC and Company Reports as at 25 March 2021
Source: RWC and Company Reports as at 25 March 2021
Chart 7: World Gold Supply by Geography
Source: RWC and Bloomberg as at 1 March 2021
Chart 8: China is a key driver of global nuclear power build-out
Estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so.
Furthermore, EMEA is also home to the largest deposits of uranium. The outlook for uranium is positive due to supply curtailments by key industry players such as Cameco. Nuclear capacity is increasing in countries such as Japan, China and India due to the constant search for more sustainable forms of energy. This is offsetting the decommissioning and decline of nuclear as a source of electricity generation in Western countries. Additionally, we believe that nuclear power will regain political support in the US and parts of Europe which will drive life extensions of existing reactors and positively impact medium term demand.
Kazatomprom is the world’s largest uranium producer commanding a direct share of 20% of the world’s production and 20% of the world’s uranium reserves. It is also the lowest cost uranium producer operating across 13 mines in Kazakhstan. Kazatomprom we believe will be a key beneficiary from the expected rise in uranium prices.
The names shown above are for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.
Latin American equities have a strong outlook. We believe a combination of low interest rates globally, strong commodity prices and a weaker dollar will result in a robust recovery in GDP growth and have a positive effect on currents accounts. Additionally, Latin American equities have usually outperformed during the recovery period of economic crises.
History suggests there is significant upside in Latin American equities from here given our weak dollar view. We have identified several themes in Latin America that we believe are poised to outperform over the long-term including infrastructure and financial inclusion. More importantly, we see a clear trend of improvement in ESG which will continue to accelerate.
Investment opportunities in Latin America
The infrastructure deficit in the region is large, especially in Brazil, as outlined in Chart 9. Brazil’s current administration has an infrastructure plan of c. US$42bn over the next two years, which includes railways, roads, ports and airports. The impact of Covid-19 suggest that investing in infrastructure is more important now than ever in order to return to economic growth. The IMF forecasts that investment as a percentage of GDP for the continent will increase markedly over the coming years.
Rumo is the largest independent railway operator in Brazil. It is the only railway that operates from Rondonopolis, where grain is produced, to the largest port in Brazil, Santos Port. The company covers the three main export corridors in the country that accounts for nearly 80% of the total GDP of Brazil. The company is well-placed to benefit from Brazil’s economic recovery and the positive outlook for the soft commodities price cycle. Additionally, the company finalised Malha Paulista’s 30-year concession renewal in 2019 and successfully raised US$1.3bn last year, in part to fund new growth projects. Rumo has a stable balance sheet and has attractive valuations.
Infrastructure
Source: RWC and Bloomberg as at 1 March 2021, based on the latest information available
Chart 9: Infrastructure development will aid economic growth in Latin America
The names shown above are for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.
Credit penetration is low in Latin America compared to developed markets
and even other emerging markets. We believe that financial inclusion in
Latin America is poised to continue to outgrow developed markets in the next five years.
Bradesco is one of the leading banks in Brazil and has consistently delivered resilient growth in net income while maintaining robust asset quality and capital ratios in recent history. The banks' funding is also strong with a high level of demand and savings deposits. Bradesco has provisioned aggressively in response to Covid-19 and its coverage ratio is expected to be over 300% this year. We believe that Bradesco will be a key beneficiary of the low credit penetration in Brazil.
Financial inclusion
Source: RWC and Bloomberg as at 1 March 2021
Chart 10: Credit penetration remains low in Latin America
The names shown above are for illustrative purposes only and is not intended to be, and should not be interpreted as, recommendations or advice.
Emerging markets company valuations are attractive compared to developed markets. Combined with considerable growth opportunities across sectors, we believe that this is a favourable time to gain exposure to the emerging markets outside of China.
Emerging market valuations
Chart 11: Relative valuations, price to book
We believe there are many exciting investment opportunities in the emerging markets universe outside of China; from some of the world’s most advanced technology companies, such as TMSC and SK Hynix in North Asia, to the more traditional emerging market companies with exposure to commodity producers and secular growth economies moving up the consumption curve in ASEAN, India, EMEA and Latin America.
We believe attractive growth rates and low valuations are abundant across these markets. Considering the long-term opportunities, we are positive about the structural developments in regions outside of China and these should not be overlooked by investors.
Conclusion
Source: RWC and Bloomberg as at 25 March 2021. All information is based on the country and regional MSCI indexes
*Average P/B ratio taken across mainstream EM Asia excluding China.
DISCLAIMER
The term “RWC” may include any one or more RWC branded entities including RWC Partners Limited and RWC Asset Management LLP, each of which is authorised and regulated by the UK Financial Conduct Authority and, in the case of RWC Asset Management LLP, the US Securities and Exchange Commission; RWC Asset Advisors (US) LLC, which is registered with the US Securities and Exchange Commission; and RWC Singapore (Pte) Limited, which is licensed as a Licensed Fund Management Company by the Monetary Authority of Singapore.
RWC may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. RWC seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.
This document is directed only at professional, institutional, wholesale or qualified investors. The services provided by RWC are available only to such persons. It is not intended for distribution to and should not be relied on by any person who would qualify as a retail or individual investor in any jurisdiction or for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation.
This document has been prepared for general information purposes only and has not been delivered for registration in any jurisdiction nor has its content been reviewed or approved by any regulatory authority in any jurisdiction. The information contained herein does not constitute: (i) a binding legal agreement; (ii) legal, regulatory, tax, accounting or other advice; (iii) an offer, recommendation or solicitation to buy or sell shares in any fund, security, commodity, financial instrument or derivative linked to, or otherwise included in a portfolio managed or advised by RWC; or (iv) an offer to enter into any other transaction whatsoever (each a “Transaction”). No representations and/or warranties are made that the information contained herein is either up to date and/or accurate and is not intended to be used or relied upon by any counterparty, investor or any other third party.
RWC uses information from third party vendors, such as statistical and other data, that it believes to be reliable. However, the accuracy of this data, which may be used to calculate results or otherwise compile data that finds its way over time into RWC research data stored on its systems, is not guaranteed. If such information is not accurate, some of the conclusions reached or statements made may be adversely affected. RWC bears no responsibility for your investment research and/or investment decisions and you should consult your own lawyer, accountant, tax adviser or other professional adviser before entering into any Transaction. Any opinion expressed herein, which may be subjective in nature, may not be shared by all directors, officers, employees, or representatives of RWC and may be subject to change without notice. RWC is not liable for any decisions made or actions or inactions taken by you or others based on the contents of this document and neither RWC nor any of its directors, officers, employees, or representatives (including affiliates) accepts any liability whatsoever for any errors and/or omissions or for any direct, indirect, special, incidental, or consequential loss, damages, or expenses of any kind howsoever arising from the use of, or reliance on, any information contained herein.
Information contained in this document should not be viewed as indicative of future results. Past performance of any Transaction is not indicative of future results. The value of investments can go down as well as up. Certain assumptions and forward looking statements may have been made either for modelling purposes, to simplify the presentation and/or calculation of any projections or estimates contained herein and RWC does not represent that that any such assumptions or statements will reflect actual future events or that all assumptions have been considered or stated. Forward-looking statements are inherently uncertain, and changing factors such as those affecting the markets generally, or those affecting particular industries or issuers, may cause results to differ from those discussed. Accordingly, there can be no assurance that estimated returns or projections will be realised or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this document may be aggregated data of Transactions executed by RWC that has been compiled so as not to identify the underlying Transactions of any particular customer.
The information transmitted is intended only for the person or entity to which it has been given and may contain confidential and/or privileged material. In accepting receipt of the information transmitted you agree that you and/or your affiliates, partners, directors, officers and employees, as applicable, will keep all information strictly confidential. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information is prohibited. The information contained herein is confidential and is intended for the exclusive use of the intended recipient(s) to which this document has been provided. Any distribution or reproduction of this document is not authorised and is prohibited without the express written consent of RWC or any of its affiliates.
Changes in rates of exchange may cause the value of such investments to fluctuate. An investor may not be able to get back the amount invested and the loss on realisation may be very high and could result in a substantial or complete loss of the investment. In addition, an investor who realises their investment in a RWC-managed fund after a short period may not realise the amount originally invested as a result of charges made on the issue and/or redemption of such investment. The value of such interests for the purposes of purchases may differ from their value for the purpose of redemptions. No representations or warranties of any kind are intended or should be inferred with respect to the economic return from, or the tax consequences of, an investment in a RWC-managed fund. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. Nothing in this document constitutes advice on the merits of buying or selling a particular investment. This document expresses no views as to the suitability or appropriateness of the fund or any other investments described herein to the individual circumstances of any recipient.
AIFMD and Distribution in the European Economic Area (“EEA”)
The Alternative Fund Managers Directive (Directive 2011/61/EU) (“AIFMD”) is a regulatory regime which came into full effect in the EEA on 22 July 2014. RWC Asset Management LLP is an Alternative Investment Fund Manager (an “AIFM”) to certain funds managed by it (each an “AIF”). The AIFM is required to make available to investors certain prescribed information prior to their investment in an AIF. The majority of the prescribed information is contained in the latest Offering Document of the AIF. The remainder of the prescribed information is contained in the relevant AIF’s annual report and accounts. All of the information is provided in accordance with the AIFMD.
In relation to each member state of the EEA (each a “Member State”), this document may only be distributed and shares in a RWC fund (“Shares”) may only be offered and placed to the extent that (a) the relevant RWC fund is permitted to be marketed to professional investors in accordance with the AIFMD (as implemented into the local law/regulation of the relevant Member State); or (b) this document may otherwise be lawfully distributed and the Shares may lawfully offered or placed in that Member State (including at the initiative of the investor).
Information Required for Distribution of Foreign Collective Investment Schemes to Qualified Investors in Switzerland
The representative and paying agent of the RWC-managed funds in Switzerland (the “Representative in Switzerland”) is Société Générale, Paris, Zurich Branch, Talacker 50,
P.O. Box 5070, CH-8021 Zurich. In respect of the units of the RWC-managed funds distributed in Switzerland, the place of performance and jurisdiction is at the registered office of the Representative in Switzerland.