Global equities: Perfect storm in US and Europe could spark cyclical dash to emerging markets
Feroz Basa, head of the Global Emerging Markets Fund at Sanlam Investments
The US is currently in bubble territory: the dollar is too strong, inflation is on the rise, and equities are expensive. The developed world’s growth is stagnant and an energy crisis is crippling Europe. Against this background, the cheap valuations of stocks in emerging markets (EM) are attracting cash previously invested in the developed world. It is the beginning, pundits say, of a significant EM cycle.
Feroz Basa, head of the Global Emerging Markets Fund at Sanlam Investments, says the US is ‘taking its medicine’ following excessive fiscal stimulation post the COVID pandemic. “Cash has been pouring into US equities for over a decade. But now that market looks far less attractive, and if we bear in mind that investors need to keep a portion of their assets in equities due to rising inflation globally, the cash must move somewhere.”
He said while there have been allocators moving cash into emerging markets already, the major funds are still significantly underweight. We are seeing the initial flows move into US treasuries as yields go up and hence the current dollar strength. Money will eventually move out of US equities and treasuries due to excessive valuations and the sheer size of fund holdings. This should lead to dollar weakness as investors sell out of those funds in search of higher returns elsewhere.
“Investors should consider being in the right place at the right time – at the beginning of the cycle, not the mid-point.”
The Sanlam Investments Global Emerging Markets (GEM) Fund has been in existence for over seven years now with the new team having recently achieved their three-year track record. Basa has seen inflows of $20-million into the fund in the last quarter alone.
Basa says, “If you go back to COVID and look at the stimulus chart of the US, Europe, Japan and China, you can see that China, as a big emerging market, did not employ stimulus measures nearly as much as the US and all these other regions. So, China doesn’t have suffer from an over stimulated economy and hence won’t face the massive inflation that is the consequence now being faced by the over-stimulators.
“Similarly, other emerging markets, like Brazil, are in a much healthier position now because their inflation has potentially peaked is not nearly as high as in Europe and the US. For the first time in a decade, inflation is higher in developed markets than emerging ones.”
So, says Basa, China still has firepower. “In fact, China can now stimulate its economy, while the developed markets try to cool theirs.”
He said that what underpins everything is valuation. “This is the starting point. The price you pay today determines your future returns. The US currently makes up 60% of a typically developed market portfolio and valuations are really high. The US and Europe are under significant pressure. Emerging markets have already priced in all the bad news based on current valuations.
“So, all these ingredients put together are very positive for EMs and that’s why we are very bullish on emerging markets right now.”
Basa said global emerging markets asset management is a very competitive space. “There is huge merit, we believe, in investing through a fund manager based in an emerging market. We understand how to operate in volatile and unpredictable environments, and we understand the underlying dynamics that drive less formal economies. This allows us to make smart stock picking decisions and to analyse individual regions from a perspective of deep experience.”
The Emerging Markets team at Sanlam Investments have 55 years’ combined experience with a wide and diverse range of experience in different emerging markets. The fund is benchmark agnostic, which allows for a level of agility when acting on high conviction ideas.
Currently, top stock picks for Basa’s fund are: JD.com, Genomma Lab and Netease.
ENDS
