This is a sponsored article from Vontobel Asset Management.
Roger Merz, CFA
Head of mtx Emerging Markets, Senior Portfolio Manager
Vontobel Asset Management
Following a two-year period during which returns on invested capital (ROIC) in global emerging markets expanded, we now expect ROIC to decline in 2020 before a recovery in 2021 sets in. How strong the recovery will be and which form it finally takes – V-shape, U-shape or even W-shape – is still difficult to assess. However, as in other crises through history, companies with superior profitability, leading business models and strong balance sheets should get even better and emerge from the crisis stronger. The competitive positioning gap should undoubtedly widen versus those companies with questionable business models and a weak track-record of operational performance.
Based on our assumptions, the better competitive position should allow these leading companies to capture more future growth (“access to growth”), thus giving them the ability to “outgrow” the average company in emerging markets. In addition, very loose monetary and fiscal policies should be supportive of equity markets. Interest rates are at record lows and in many regions, even negative, forcing investors into higher yielding assets, including equities.
Leaders tend to stay leaders
Dynamic growth rates in emerging markets have produced many profitable businesses in this region. Market participants are often slow to fully acknowledge high ROICs, which we consider an important share price driver. This failure on the part of the market creates opportunities for active investors.
We believe that by using systematic screening as well as fundamental research, it is possible to spot portfolio candidates with:
- above-average quality in terms of ROIC, industry positioning and ESG
- above-average growth
- below-average valuation
Profitable companies with a superior industry position are able to invest in future growth – and their stocks often reflect this. Moreover, such leaders tend to stay leaders.
Chart 1: A strong framework is required to distinguish leaders from laggards
A four-pillar approach to identify attractively valued industry leaders
Source: Vontobel Asset Management
Asian companies relatively resilient within emerging markets
The pandemic has hit emerging markets hard, but leading Asian companies have proven their resilience. With a first mover advantage in reopening the economy, China is on a recovery path. While prospects for Chinese exports aren’t improving, domestic consumption is picking up.
The recovery of risk appetite since its trough on 23 March led to a strong recovery of some 30 percent in emerging markets. In contrast, earnings estimates have been cut by some 20 percent since start of the year and earnings revisions still remain negative. Asia was in the eye of the storm in the first quarter, while in other emerging markets this is mostly the case in the second quarter. Overall the pace of negative revisions started to bottom out and first quarter earnings season shows that the worst has passed. With more than half of the companies having reported so far this year, Asia is significantly better off than Latin America as Asian countries have generally handled the pandemic quite well, while Latin America, for example, was slow to react. In terms of sectors, Information Technology was much better off than cyclicals.
Our outlook for the second half of the year
The weakness in the Chinese manufacturing PMI could continue because there is less appetite for Chinese exports, but at the same time, there is an ongoing shift to a more service-based economy in China, reducing the dependence on manufacturing. Chinese domestic consumption is picking up underpinned by high-frequency indicators such as restaurant visits and by China’s services PMI that improved for the third consecutive month.
The discussion about de-globalisation and shifts in supply chains will continue. We expect this process to take up to two years. That said, there should be some relocation, and beneficiaries could include Vietnam or India. This should also help diversification as Apple, for instance, was heavily dependent on China production.
In addition, the re-emergence of tensions between US and China remains one of the biggest risk factors. Developments around the Hong Kong security law or the question whether Chinese companies’ American depository receipts (ADRs) may be delisted in the US need to be closely monitored.
Market consensus expects earnings per share to decline around 10% this year. Since they are now down some 20%, there may be a gradual recovery as the year progresses. For next year, consensus sees EPS growing by 15-20% again.
Contact:
Suzanna Wong
Executive Director
Head of Intermediary Distribution Asia and Institutional SEA
Vontobel Asset Management Asia Pacific Ltd.
1901 Gloucester Tower, The Landmark, 15 Queen’s Road Central, Hong Kong
T +852 3655 3979, M +852 6323 5513
[email protected]
DISCLAIMER
The views and opinions herein are those of the individuals mentioned above and do not reflect the opinions of Vontobel Asset Management or Vontobel Group as a whole. The views may change at any time and without notice. This document is for information purposes only and does not constitute an offer, solicitation or recommendation to buy or sell any investment instruments, to effect any transactions or to conclude any legal act of any kind whatsoever.
This is a sponsored article from Vontobel Asset Management.
