FOCUS: Emerging and global markets MARKET OUTLOOK: Despite recent macroeconomic setbacks in both Europe and North America, we see several important positive macroeconomic signals in several emerging market (EM) countries that we believe provide a less volatile outlook for the next six months.
Inflation – we have seen for many months, either a stabilizing or falling trend depending on the country. For example, China has reported in recent days inflation levels that have continued to decline. In Brazil, headline inflation is largely contained, although it remains on the higher side. As we have commented in the past, EM central banks have, for the most part, raised interest rates well ahead of advanced economies. This led us to expect that the EM rate cycle was nearing its peak. Growth – there is no doubt that expected lower global growth is affecting emerging market growth expectations. Importantly, with oil prices coming down significantly from recent highs, growth erosion can now be seen as more favorable given that many EM countries are net importers. With fiscal and current account balances nearly stable and under control, we see many Eastern countries having adequate resources to fend off macroeconomic externalities while stimulating spending in their respective countries.
Overall, we view the outlook for the various EM economies in which the mandate participates in a more constructive lens.
From a bottom-up perspective, the picture looks much more favorable. As active managers, we are not dependent on what the EM benchmark defines. As such, we have actively invested in EM companies whose fundamentals have performed well during these volatile times. We’ve seen quarterly earnings reports that were largely above expectations and whose fundamental outlook speaks strongly for the medium to long term. The precedent of EM markets outperforming developed markets over the long term and the many major events that led to macro, market and micro improvements.
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TOP CHOICES:
Top picks by Patricia Perez-Coutts Patricia Perez-Coutts, portfolio manager at PenderFund Capital Management, her top picks: Sociedad Quimica y Minera de Chile, Taiwan Semiconductor and NetEase. Chemical and Mining Society of Chile (SQM NYSE) Average price per share paid: US$86.33 We like that SQM is the lowest producer of lithium and specialty fertilizers. Its products are also mined in an environmentally friendly way compared to other producers. Importantly, the demand and price outlook for its various products remains positive given the automakers’ strong EV capitalization plans. The company is an efficient operator and has carefully planned upcoming capacity expansions. Operating margins are sustainable at 47%. Taiwan Semiconductor (TSM NYSE) Average price per share paid: NT$494.67 We like the moat TSMC has with critical and proprietary knowledge in 3-5nm semiconductor chip design. The demand for chips is expected to continue to grow significantly given the greater diversification of uses and industries such as automotive, cloud computing, EVs, internet of things, artificial intelligence, 5G and accelerating digital transformation. Sustainable return on equity at 22 percent. NetEase (NTES NASD) Average price per share paid: HK$145.39 We like its strong track record in developing PC and mobile games across genres, its ability to achieve a long lifecycle for existing PC and mobile game titles, and its ability to maintain a balance of monetization on existing games and spending on new games. stable margin profile. Continued growth both in China and internationally. Netease is likely to become a major content provider for the metaverse. SQM NYSENNY TSM NYSENNY TES NASD NNY
