Global emerging markets (GEMs), despite trading higher, have been volatile over the past 12 months. Sentiment oscillated sharply, as several major GEM countries including India, Indonesia, South Africa, and Mexico went through elections. Markets also grappled with elevated inflation in developed markets, along with timelines for interest rate cuts, geopolitical tensions, and the pace of the economic recovery in China.
Country lens
Taiwan and Korea, which play a vital role in the global technology supply chain, have been in vogue the past 12 months due to strong demand for their technology hardware products, driven by artificial intelligence (AI).
Indian markets rallied as Prime Minister Narendra Modi’s party came back to power with the help of its allies, which means more checks and balances, while the retention of key cabinet ministers signalled political continuity and stable policies.
Latin America’s biggest markets, Mexico and Brazil, were out of favour, with slower than expected pace of interest rate cuts in the regions.
And finally, China’s stock market, which experienced substantial declines in the last couple of years, amid a property downturn and weak consumer confidence, is now showing early signs of a recovery.
From a style perspective, GEM saw extreme momentum, both on the positive and negative sides. We continue to see an environment where stock prices are being driven by short-term sentiment despite valuation extremes, rather than medium-to long-term fundamentals. This creates headwinds for our quality-growth and longer duration-focused investment style.
China’s impact on GEMs
In China, consumer sentiment remains subdued with weakness in property prices causing consumers to focus on de-leveraging, rather than spending. However, the savings rate has increased post COVID-19, suggesting that this is a problem of confidence to spend, rather than ability to spend.
China’s global competitiveness and innovation of its people is not lost. China remains one of the leading consumers of mid- to high-end products and services in the world. Rising geopolitical tensions and disrupted supply chains are hastening the end of the era of globalisation and the process of decoupling.
Many developed market companies are redirecting production that was previously outsourced to China to other EM countries that are closer to home (nearshoring) or to friendly partners (friendshoring). For instance, Apple has moved its manufacturing to India and Tesla has moved its factories to Mexico.
On-the-ground views
We’ve remained close to our investee companies. The past 12 months, we’ve continued to focus on completing regular research trips to grasp market conditions first-hand and deepen our knowledge and understanding of businesses in which we invest.
In China, where consumer confidence remains subdued and consumer stocks continue to languish, we are mindful of negative momentum risks. While we are not increasing exposure, despite attractive valuations, we are making our exposure more diversified.
Looking ahead
Overall, if we consider fundamentals, the quality of underlying assets or valuations, we believe that GEMs are in better shape, more resilient, and more attractively valued than in the past.
Medium-to long-term fundamentals are reasonable today compared to the past and we feel GEMs’ strong fiscal position stands the asset class in good stead.
Or explore our other areas of focus here:
- Foreword - Lawrence Handon, Managing Director
- Australian equities - Paul Taylor, Head of Investments, Australia and Portfolio Manager, Fidelity Australian Equities Fund
- Global equities - James Abela and Maroun Younes, Co-Portfolio Managers, Fidelity Global Future Leaders strategies
- Asian equities - Anthony Srom, Portfolio Manager, Fidelity Asia strategies
- Sustainable investing - Daniela Jaramillo, Head of Sustainable Investing
