The word from the manager: Gemway Assets

'Time to return to investing in emerging markets'

"Among Korean companies, Sk Hynix is interesting, while on the China side there are opportunities on Alibaba, Tencent, Meituan and Pindoduo."

by Isabella Della Valle

5 October 2024

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3' min read

Key points

Today how is the approach towards the emerging ones?
Which Korean companies do you prefer?
What about China?

3' min read

Emerging markets, aided by the wave of stimulus measures in China, recovered ground. However, this asset class lags behind developed markets by 2 percentage points since the beginning of the year and by more than 30% over the past three years. This is the starting point for Ariel Wang, emerging markets manager and analyst for Gemway Assets, who is convinced that it is time to return to investing in emerging markets, gradually building up a position.

Let's start with the Fed: how do you assess the softer stance on rates?

Historically, lower rates in the US have been favourable to emerging assets, especially in the event of a 'soft landing', as this would allow emerging markets to focus on growth instead of defending their currencies. Therefore, the start of a more accommodative monetary policy by the Fed is a very positive factor for emerging markets. In order to protect their currencies against the dollar, most of these countries have been forced to maintain restrictive policies despite falling inflationary pressures. Now, however, the Philippines and Indonesia have already reduced their rates, and South Korea, South Africa and Mexico may follow. We expect these economies and emerging equity markets to benefit from the broadening of the easing cycle.

How is the approach to emerging markets today?

Emerging equities are still trading at a discount to developed markets and are underrepresented in global portfolios. Although uncertainties over the US presidential election have not yet been resolved, with the possibility of new developments in geopolitics and trade tensions, we may see clearer investment opportunities in emerging markets by year-end. The reindustrialisation drive in the US (as well as Europe) represents a multi-year opportunity, with Mexico, Korea and Taiwan among the main beneficiaries. Another positive factor is the falling oil price, which favours many emerging countries, despite the conflicts in the Middle East and Chinese stimulus measures.

Could you go into more detail on the choice of countries?

If the Chinese government fulfils its promises with concrete measures, China remains tactically attractive. This market has many companies that have adapted to regulation and trade tensions by seeking other sources of growth. However, after the recent rise, we will wait for a better entry point. South Korea remains attractive due to its positioning in the semiconductor industry and investment in artificial intelligence.

Which Korean companies do you prefer?

Companies such as Sk Hynix, a global leader in the production of artificial intelligence-related semiconductors and a major supplier to Nvidia, are well positioned. Furthermore, the government's 'Value Up' programme aims to increase the valuation of Korean companies and will have long-term effects.

Other countries?

India, buoyed by structural reforms, sees economic growth driven by freer companies, with a stock market supported by steady domestic flows. In South Africa, the ANC's loss of its majority in the last elections could lead to long-overdue reforms.

And what about China?

The Chinese economy continued to deteriorate, with a very weak second quarter and disappointing macro data, such as industrial production and retail sales. Faced with growing investor pessimism, the Chinese authorities decided to intervene. The People's Bank of China initiated a change in monetary policy with reductions in interest rates (20bp) and the reserve ratio (50bp), along with support measures for the property and stock markets. The latest Politburo meeting focused exclusively on the economy, with conclusions similar to Mario Draghi's famous 'whatever it takes'. The guidelines concern support for real estate, consumption, a more favourable environment for the private sector and the creation of long-term investment funds. On the eve of a week in which domestic markets were closed for national holidays, investors suffered the Fomo - Fear of Missing Out - syndrome, and in five days, domestic Chinese stocks (A Shares) rose 25%, while the Hong Kong stock exchange rose 16%. Although more and more investors, both institutional and private, are rushing to invest in this undervalued market, volatility is likely to remain high in the short term. The recent rise has already led to a revaluation of Chinese equities. If the stimulus measures materialise, a new earnings cycle could further improve risk-adjusted performance.

Interesting titles?

Some solid stocks are Alibaba, Tencent, Meituan and Pindoduo, which show significant discounts compared to their international peers, look attractive. We also like Shenzhen Inovance, a leader in industrial automation, which is outperforming international competitors in the Chinese market, exposing us to the possible economic recovery scenario.