Transcript: Emerging market opportunities increase as valuations drop
Ross Cameron of Northcape Capital says discerning investors can find high-quality growth companies on the cheap.
- October 25, 2022 October 25, 2022
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive, and powered by Canada Life.
For today’s Soundbites, we’re talking about the outlook for emerging markets with Ross Cameron, portfolio advisor and analyst with Northcape Capital. We talked about regions he likes and regions he’s avoiding.
And we started by asking how he would characterize the current state of emerging markets.
Ross Cameron (RC): The long-term appeal of emerging markets remains unchanged. This is not universal across emerging markets, but in the most attractive areas — India, Indonesia, Latin America — you see strong population growth, a maturing of the population period, faster growth in the middle class that will underpin strong consumption. And then other long-term structural drivers such as urbanization, education, rising healthcare, and so on. So, you know, we continue to believe the long-term appeal of emerging markets is very, very high.
The risk of a global recession in 2023.
RC: I think the base case has to be a U.S. recession in 2023. You have a tight labour market, very high inflation and the Fed needs to aggressively raise rates. We think the Fed actually wants to engineer a mild recession. It needs to do that. But we’re not expecting a global financial crisis or a very deep recession. Within emerging markets, we think countries like India, Indonesia, countries that have strong domestic demand should continue to see good GDP growth during that period.
Regions he likes right now.
RC: We think Mexico is well placed in this environment. We’ve had a long-standing view that the U.S.-China relationship is in structural decline. And Mexico is the obvious beneficiary. It has very good connectivity with the U.S., the NAFTA free trade agreement creates a very favourable environment for Mexico. And so, we’re seeing a sustained increase in FDI in Mexico. We also like India and Indonesia. In both cases, the domestic economy is doing very well. You’re seeing a recovery from the Covid pandemic. The banking sector is in good shape. And you’ve got this strong demographic dividend that the middle class continues to grow very strongly. So, we like both of those markets.
Regions he’s avoiding.
RC: The regions we see as vulnerable in this environment are regions that have a poorly capitalized banking system, and have structural domestic issues, which means that they are vulnerable to some kind of financial shock. So, South Africa, Turkey, much of Eastern Europe. But it’s probably worth talking a little bit more about China. You have a situation currently where China’s residential property market is in the worst downturn since, really, privatization in the early 1990s. The Covid Zero approach hasn’t helped. We’ve also seen a huge overbuild in China. And that’s a consequence of a historic stimulus which has resulted in inefficient capital allocation. And most experts believe that China’s population will halve from the current level by 2050. There’s never really been a large country in history that has undergone a population decline such as the one that China is currently facing. So that’s a very big headwind to growth. So, we see China continue to be a derating story, a relatively unattractive place to allocate capital.
Company names he likes.
RC: We like emerging market banks that meet the following criteria: That are well capitalized, that have strong deposit franchises, and are in countries that have low economic risk. So, we like [Jakarta-based] Bank Central Asia in Indonesia. We like [São Paulo-based] Itaú Unibanco in Brazil. We like [Mumbai-based] HDFC Bank in India. And Banorte [Monterey-based Grupo Financiero Banorte] in Mexico. And all of these banks meet those criteria.
And, finally, what’s the bottom line on current opportunities and risks in emerging markets?
RC: The subset of companies that we invest in within this vast universe of emerging markets are really as cheap as we’ve seen since right in the midst of the GFC back in mid-2008. For investors that can take a medium- to long-term view, these high-quality long-term growth companies are very, very cheap at the moment. The issue of course is timing. Because there’s still a number of icebergs out there. Markets could get even cheaper, but on a medium- to long-term view, it’s rare that we see these high-quality companies trading on such discount valuations.
Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Ross Cameron of Northcape Capital.
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