Emerging markets (EM) provide a valuable diversification opportunity for equity investors compared with developed markets (DM). In 2023, technology sectors, especially the “Magnificent 7”, dominated returns, widening the valuation gap between EM and DM exacerbated by China’s political de-rating. Looking ahead in 2024, diversified returns are expected, with a recovery in commodity prices and increased interest in value stocks, potentially improving EM performances relative to DM.
Where to enter emerging markets
In a reversal from last year, Asia has dominated performance over Latin America and EMEA. This was driven by the very strong cycle we have seen in certain AI-related semiconductors that has led Taiwan, for instance, to rise by more than 20% in dollar terms. At the other end of the spectrum, Brazil lost over 10% due to the ongoing macro concerns on fiscal policy and the outlook on US interest rates. These factors have had a significant impact on the currency, particularly in April. However, we think this is temporary and provides interesting entry points.
Shifting investment strategies in China
Historically, we have focused on China, emphasising renewable energy, clean mobility, energy storage, healthcare, and education. Despite China’s leadership in these areas, risks have increased due to the US and the EU having decided to reduce their dependence on China in renewable energy and clean mobility through various policies aimed at supporting local manufacturing and keeping Chinese companies out through trade barriers. Chinese regulators have also increased scrutiny of companies in healthcare and education. In addition, some Chinese healthcare companies have been targeted by recent US legislation. Consequently, we think the focus should be on companies which sell mainly to the domestic market or which export to other emerging markets and which are not specifically targeted by increased domestic regulation.
India’s growing importance
India became the fifth-largest global economy in 2024, driven by demographics, urbanisation, infrastructure development, and increased government spending. Initially, we had focused on the healthcare and microcredit themes, but over the past four years, our attention has expanded to small-to-medium-sized businesses and environmental opportunities, particularly those benefiting from infrastructure developments and a rising demand for clean energy.
Thematic investment opportunities and outlook
Financial sectors remain attractively valued, benefiting from higher rates and stable asset quality. Grid modernisation is crucial for the energy transition, presenting significant investment opportunities. Education companies outside China are attractively valued, driven by structural trends in emerging markets. The semiconductor sector is growing due to AI-related investments, focusing on advanced, energy-efficient manufacturing. Clean mobility in EVs and batteries also shows promise, particularly in regions unaffected by anti-China trade restrictions.
Emerging market equities are currently undervalued, giving potential diversification benefits. Despite recent weak performances in some environmental themes, a recovery is anticipated due to the ongoing demand for low-carbon solutions, making it an opportune moment to think about emerging markets in impact investing.
Mathieu Nègre