2020 outlook: Opportunity for active investors in emerging markets

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2019 Market Review

Stock market returns in 2019 ended on a high with the MSCI EM index adding over 18% (in U.S dollar) for the year, with a 12% gain in the final quarter. Despite this very strong total return, emerging equities still under performed their developed market counterparts. In particular the US delivered a blockbuster year at 31% (as measured by the S&P 500 Index).  It was a highly eventful year characterized by a material increase in volatility and a moderation in GDP growth. Elections, protests, trade wars and interest rate policy were just some of the bigger events we witnessed in the year where the trade war in particular influenced sentiment.

The ongoing US-China trade dispute dominated headlines where market sentiment often seemed to follow the ups and downs of the negotiation (or perhaps just Presidents Trump’s tweets).  There were many “false starts” which corresponded to big swings in the market. We did see a material de-escalation in December where both sides agreed to a “phase one deal”, which proved a strong tailwind into year end. Perhaps a trade “truce” is a more apt description given the detail around several elements of the agreement (particularly in relation to intellectual property and technology transfer) remains sparse at best. Having said this, further tariffs have been avoided for now while the US will roll back certain measures in exchange for increased agricultural purchases by the Chinese.  There is little doubt the dispute is harming global trade so this rollback is certainly welcome. Chinese equities ended the year with a gain of over 23%.

Fears over a potential US recession spurred the US Federal Reserve (FED) to revert back to cutting interest rates in 2019. They cut the benchmark rate by 25bps three times which was in stark contrast to the four hikes they made in 2018. These actions proved a strong contributor to sentiment and perhaps eased the pressure on some of the more indebted emerging nations. It also somewhat curtailed the march forward of the US dollar with several emerging market currencies gaining ground. The Russian Rouble was strongest, gaining over 11% versus the greenback. 

Outlook

Every year events occur that shape the short-term narrative. Some go on to become structural issues while others drop quickly from the discussion. We do not see any change to this general principle for 2020 or for any following year for that fact. We do not recall many commentators predicting a blockbuster year for equities at the start of 2019 and see where we finished. 

For us the argument for investment in the developing world remains wholly intact. It is supported by structurally faster growing economies, lower but growing incomes, positive demographics and the huge potential for efficiency gains (driven in a large part by the adoption of technology). For these reasons alone we believe making an allocation to the space makes sense for a long-term investor. The bottom-up picture is really where the opportunity lies of course. There is in the region of 25,000 listed companies in developing countries. This is a very substantial searching ground for active investors. Clearly there are a huge number of companies one should go nowhere near but there are also many best-in-class businesses, run by top quality management who have identified an opportunity and who have built fantastic franchises. This is what should drive the conversation, but sadly most focus almost exclusively on the top-down picture predicated around the makeup of poorly defined indices. 

Is now the time to enter the space? We think it is always the right time to invest in the developing world.

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Disclosures

Views and opinions have been arrived at by LGM Investments, a part of BMO Global Asset Management, and should not be considered to be an investment recommendation. The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Investing in emerging markets can be riskier than investing in well-established foreign markets

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