Emerging Markets: Keeping the Faith

Alison Shimada: It’s really important to consider investing in emerging markets. And from a timeframe perspective, now is the time. Do it in a sensible way and participate consistently.

Joseph Dore: That’s Alison Shimada, head of the Total Emerging Markets Equity team here at Allspring. I’m Joseph Dore, head of International Consultant Relations at Allspring, and welcome to SpringTalk. As you may have heard from our previous episode, with the new name, SpringTalk, we trust our listeners to hear connotations of what being Allspring is all about—fresh, new perspectives. We’re taking a new approach to investing—elevating investing to be worth more. As you’ll hear in future episodes and certainly today, everyone’s voice at Allspring is important. And there’s one particular voice that is very important to today’s episode. That person is you, Alison Shimada. Welcome to SpringTalk.

Alison: Thank you, Joe. It’s nice to be here.

Joseph: So, Alison, you’ve joined us today to talk all things emerging markets. And we’ve rather provocatively titled this podcast, Emerging Markets: Keeping the Faith. So, that should give listeners a sense of the debate that’s in store today. Shouldn’t it, Alison?

Alison: Yes, definitely.

Joseph: We’re going to dive right in. And I think it’s fair to acknowledge that those clients who have stuck with emerging market equities over the last decade or so, it’s been quite the ride and probably hasn’t always been easy to keep the faith. So, Alison, I’m going to ask you to take a few steps back, get off the ride, and remind our listeners of the simple strategic case for investing in emerging market equities.

Alison: Yeah, I think we have to acknowledge that it’s been difficult for emerging markets for the last decade or so. And the thing is that the U.S. has just been extraordinarily strong and people have logically stuck with that asset class, in particular. So, I think that what you’ve ended up with is emerging markets looking extremely well-valued and underpriced compared to the U.S. It’s selling it about 12 to 13 times P/E (price-to-earnings) versus the U.S. at 20 now. And I think it’s really worthwhile at this point in time to think about some diversification away from the U.S. And it’s not an either/or scenario. Both can do well. Really, I mean, the U.S. has done extremely well. But also, emerging markets can also do well. There’s less concentration risk, if you think about other asset classes. So, I really think it’s a great, great time to talk about this.

Joseph: But all things considered then, how do we actually end up getting here, Alison? So, investors, as you say, have spent many, many years watching the U.S. returns in DM (developed markets) outpace those of EM (emerging markets). So, can you walk us through what’s actually happened here over the last decade? What has caused the actual client portfolio experience to be quite different to the strategic case that you so nicely outlined, Alison?

Alison: Yeah, I think what has really happened is that this massive outperformance of a small group of stocks in the U.S., rightly called The Magnificent Seven, which is really dominated by tech sector stocks. And this has really been a very strong trend. And after 10 years of quantitative easing, there’s a lot of funding in the U.S. for tech stocks, the tech industry, emerging companies, as well. But you can’t always have that much concentration. It’s just not healthy. It’s the most in 30 years. It does lead, eventually, sometimes to bubbles and overbuying. It leads to things like NFTs (non-fungible tokens) and even unregulated areas. So, it’s not great. And we always look below the 30,000-foot view for interesting companies in emerging markets, of which there are many.

Joseph: Great. Can you just give us an example of a stock that your team really likes from a process perspective right now?

Alison: Yeah, I can. There is a company in India that is a wealth management company. And as we talk about improving demographics, just like China had 20 to 25 years ago, we see a lot of Indians moving into the middle class and even up to the upper middle class. And they need their money to be managed by someone. So, we’ve met with the CEO of this company who has seen tremendous demand for people who own their own businesses or family-run businesses. They’re moving assets from fixed, assets like property and businesses, into financial assets, like the stock market or other types of financial assets. And these financial advisors help people and give them consulting. And that is something that I think that Indians will embrace going forward.

Joseph: From everything you said at this point, you’re certainly convincing me, Alison, so hopefully you’re convincing our listeners, too. So, if investors do agree with you and decide now is the time to move into EM, what should they actually do? Allison, can you give us our audience members some actionable thoughts of how to actually implement this?

Alison: Yes, well, I think that in other asset classes, like developed markets, in particular, that ETFs (exchange-traded funds) really serve the purpose of investment and, in the long term, accessing a good number of companies. But I think in emerging markets where you have 24 countries, you really need active management. There’s a lot of things involved in not just one country, but 24. And that means sentiment, elections, geopolitical risk. And stock selection is really the key in this environment. So, don’t be scared to hear that. It means that really the people who know what to do about this know it’s an opportunity. And in our case, we have people who understand the on-the-ground attitudes. There are team members who have come from these markets, speak the languages of the region, have access to domestic information, and have an accurate macro view. In the end, it’s really stock selection that matters the most in conjunction with the portfolio manager’s views.

Joseph: So, I hear a few things there from you, Alison, I hear opportunity. I hear the need for active management. I’m going to hit on one particular thing. So, we’ve got the Fed (Federal Reserve) indicating that they may ease this year. So, is that in itself a potential catalyst for emerging markets? If it does happen, tip the scales towards yes, now is the time to move into EM?

Alison: Yes, it’s a very big indicator. And people are looking for that, not only with regards to the U.S. market performance, but emerging markets, as well. Because interestingly, emerging markets countries, many of which were earlier than the Fed in raising rates, are now poised to come down, as well. And the dollar has been strong and the strength of tech sector has been overwhelming. There hasn’t been a lot of need to go overseas. But if the U.S. starts to come down in rates, then people will look elsewhere for alpha generation in other asset classes, like emerging markets. EM currencies will do better. And historically, that’s a scenario whereby the country stock markets also do well. So, we’re looking for that signaling and it’s coming in the second half. That’s our belief.

Joseph: It’s coming. You heard it from Alison. So, I’m going to go back to something we spoke about earlier, Alison. You mentioned the concentration of the U.S. stock market. I know something about you that perhaps not all our listeners know about you is that you are a strong believer of learning from emerging market history. So, with your fine knowledge of EM history, is there anything we can learn from EM on what is happening right now with a concentration in the Magnificent Seven?

Alison: Definitely. When the market in the U.S. and globally, when investors expect the U.S. Fed to ease, it’s definitely a tailwind. If you look at the data, it’s very helpful to emerging markets. In 2023 alone, there were spurts of time when the market thought that the Fed was going to actually lower rates and immediately there was a response from emerging markets, as well. And everything turned green. Now the thing is at the end of 2023, we’ve already seen some movement towards this. So, the markets have built in some of this expectation already. And I think that it will continue once you see much stronger conviction that rates are going to come down.

Joseph: Perfect. We’ve actually got to this stage of the podcast and we haven’t actually touched on one big topic. You guessed it. That topic is China. So, we’ve now actually entered the Lunar New Year. So, China is potentially the dragon in the room here. So, what are your thoughts as a team here, Alison? Is your team currently a China bull or a China bear right now?

Alison: We really think, short-term, that the market is extremely oversold. And you could see quite a strong movement upwards in the short term. I think the intermediate longer term really depends a little bit on the government’s ability to change the sentiment in the country with regards to the stock market and also the ability to formulate good fiscal policy and monetary policy. So, policy is a key catalyst in the longer term. But I do think it’s very interesting. Money has been moving into China since the end of last year. And it’s just like the U.S.—very dynamic but aging in terms of demographics. Now, China’s following the same pattern and behind that will be India 20 years from now. So, every country goes through the same process of development.

Joseph: Great. So, I think keeping the faith in China is certainly also important there. Okay, I’m going to try and wrap things up, but you got a bit more to do for us. So, we must also consider risks as well as opportunity, as we usually do. And to bring this concept to life, I’m going to talk about black and white swans in emerging markets in 2024. So, black swans, events that come as a potential surprise, or white swans, which can be more easily forecasted or predicted. So, let me go through everything that’s going on. We’ve got half the world going into election this year, population-wise, a stat which blows my mind. Clearly, a lot of those elections taking place in emerging markets. We’ve got major supply disruptions going on, not to mention escalating global conflict. So, with all of those macro forces, Alison, can you share with our audience members some black but also potentially some white swans which your team is looking at?

Alison: I would say that last year in 2023, there were a lot more black swans at that point than I feel like there are now. So, we know that there are a lot of elections, although we can anticipate what the outcome of many of those elections are. So, with that, as long as you have some visibility or can make a reasonable estimate of what’s going to happen, there shouldn’t be massive disruption, at least at the stock market level. And so, last year, you could have said Ukraine/Russia, now the issues in the Middle East, could have had a very severe impact. But we’re not allowed to invest in Russia. It’s not part of emerging markets anymore. And all the other areas of conflict also, we don’t invest in them directly. So, I think that that’s all manageable. I think with white swans, it would be India because there’s a such a high support of the current leadership of the current government, which has done a fantastic job on an economics level. We’re very positive about India. But we feel that a lot of the emerging markets, aside from China, are really interesting. Brazil, there’s been a recent election, but it’s very easy to understand what the agenda is there. India, South Korea, all these major markets are very important. And I think that the outcome of any election, plus the economy itself, is quite stable.

Joseph: Nice. I think I had more white swans than black swans there, which is definitely good for listeners to hear. Okay, so we are actually nearly at the end. Alison, today you’ve reminded our listeners of the strategic case for investing in emerging market equity, which has been all too easily forgotten amongst recent volatility. You have clearly told our listeners to keep the faith if already in EM. And for those not currently in emerging markets, you’ve asked them to potentially take a leap of faith of what could actually happen going forward. I have one final task for you, I promise, which is, you’ve spoken about a huge amount of things today, Alison, but please give our listeners one or two key takeaways which you want to leave with the audience members today?

Alison: Yeah, I think number one, that it’s really important to consider investing in emerging markets. And from a timeframe perspective, now is the time. Not when it’s peaking. Not when it’s already up 20% or 30%. But now is a great time because it’s not moving that much yet. But it will if, as we’ve discussed, rates were to come down, the dollar cost starts to weaken, things will start to happen. Number two is, I think, pick a strong framework and do it with an active management team. So, a strong framework is to consider, for example, what we’re doing, which is all shareholder returns, including buybacks, spin-offs, and cash dividends are considered. Why not collect everything? That’s half of the return over time. So, do it in a sensible way and participate consistently.

Joseph: Now is a great time. Okay. So, thanks again, Alison Shimada. We do appreciate it.

Alison: Thank you for having me.

Joseph: Thanks, as always, to our listeners. You’ve been listening to SpringTalk today. I’m Joseph Dore and we will see you next time. Thank you.

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