Emerging-market stocks are showing signs of life amid hints of earnings improvements. Where should investors look?
Emerging-market (EM) equities have lagged developed-market (DM) stocks over much of the past decade. But some trends look more promising than the headlines would suggest. Earnings revisions for EM equities are finally beginning to look up, particularly in the technology and consumer-discretionary sectors. We believe an improved earnings picture could point to long-term opportunities for EM equity investors in five key areas.
1. China Should Never Be Underestimated
As the world’s second-largest economy and largest emerging market, China is a vital cog in the global economic engine. After a strong start to the year, China’s economy has stalled of late, weighed down by weakness in the country’s real estate sector and sluggish consumer spending. But relief could be coming in the form of accommodative monetary policy and long-term structural reforms.
In late September, China’s central bank announced plans to lower its reserve requirement ratio by 50 basis points (bp) and its key interest rate by 20 bp, with more cuts to come later in the year. We view this as evidence that policymakers are serious about China’s 5% growth target for 2024. Still, we believe market excitement about these actions will be short-lived unless they’re backed by fundamental improvements.
China is also moving ahead with regulatory reforms aimed at attracting more capital and boosting share prices. China’s nine-point guidelines are encouraging firms to return cash to shareholders, while a changing macroeconomic backdrop is making it easier for Chinese companies to pay dividends. Earlier in China’s growth trajectory, many companies followed a model of aggressive expansion, issuing large amounts of stock with little in the way of dividends. Well-managed Chinese companies are now able to return excess capital to shareholders, which is important in a slower macroeconomic environment.
While this could be a catalyst for dividend yielders, we believe it’s also a good setup for exporters and market-share gainers—particularly given China’s tepid macroeconomic backdrop. Since the market tends to paint China with a broad brush, we believe investors can find select companies within all three of these segments, which are trading at attractive valuations.
2. The AI Revolution Runs Through Taiwan
As the artificial intelligence (AI) revolution gains steam, look for Taiwan to be at the forefront. After all, Taiwan produces more than half of the world’s semiconductors. It’s also home to a whopping 90% of all global manufacturing capacity for the advanced chips that power machine learning. As Asia’s equivalent to Silicon Valley, Taiwan offers investors back-door access to AI at relatively attractive valuations.
Of course, there’s more to AI than chips. Some of the biggest players in the global AI supply chain are based in Taiwan, including testing and measurement firms and manufacturers of substrate, which allows advanced chips to be attached to circuit boards. We believe the AI build-out still has room to run. AI spending has shifted from software to hardware, which should benefit AI enablers across the developing world.
3. India Could Fill a Critical Void
The world’s most populous nation is making a concerted effort to become more competitive on the global stage. Recent initiatives out of New Delhi include improving intercity travel, streamlining the country’s notoriously onerous bureaucracy, improving physical infrastructure and developing an increasingly cutting-edge digital infrastructure. In time, we believe infrastructure improvements and increased business efficiency will ripple across the Indian economy, creating new opportunities for investors. In the meantime, robust consumer spending has supported strong GDP growth in India. Currently, India’s GDP per capita is similar to the level at which China’s growth inflected upward (Display).
