Global Equity Spotlight | Episode 11

Hello everyone, and welcome back to Market Insights, a series where we delve into interesting topics affecting equity markets. Today I have Cornelius with me. Thank you for joining. So let’s kick off. Emerging markets make up around 30% of global GDP. But they’re quite underrepresented in capital markets. But we’ve also seen them performing quite well this year. Could you maybe unpack some of the opportunities that we’re seeing at the moment.

Yeah. So emerging markets contribution to global GDP has doubled over the last 20 years, from under 15% to 30% on a purchase price parity basis. It’s even a higher contribution because currencies, from China is very undervalued. But if you look at the weight in global debt markets is below 5%. And if you look at the equity market right, of the index, like MSCI ACWI, it’s around 10%. So there’s a big dislocation between the city and the 10%. And historically a lot of companies in emerging markets haven’t been that shareholder friendly. So there hasn’t been a strong correlation between GDP outcomes in a country like China, for example, and equity market returns. We think we’re at a shift since Korea has announced the value boost program recently, which has led to a big rally in the equity markets, as well as the non measures that China has announced last year.

So every ten years, an answer policy documents relating to capital markets. Historically, it was all about opening capital markets and raising money, to, fund investment and growth of these economies. But now countries like Korea and China as aging and declining populations and job creation and investment into the economy is less of a priority. Priority is not to increase returns on investment for the people that are retiring, because they can’t find good returns in money markets on their savings. And we know the property market in China is still experiencing, a deflation of the bubble. So they really do need healthy equity markets. So the people fund, their savings account a bit less and consume a bit more, which will be positive for GDP as well as, earnings for companies. So for the first time ever, we actually now have emerging market governments on the same side as shareholders.

So that’s very positive. We note advocating for complete convergence between the GDP contribution and the equity market wage. But we think the gap will narrow. So be positive about the emerging markets in general. And we’ve also seen the dollar started to weaken this year. And historically emerging markets relative performance to the MSCI ACWI is very correlated to what the dollar’s doing.

So we’ve had 15 years of severe underperformance of emerging markets as the dollar strengthened. The dollar is not the UN almost 10% this year. We know the dollar is still overvalued. If we get a just prosperity basis, that’s why the U.S. is struggling to close the trade deficit. Because things are so expensive in the US, it’s easier and cheaper to import. So if we see a continued weakness of the dollar and we see the current administration doing things, that’s, more akin to what emerging market governments do, putting pricing pressure on the fed, for example. Then, further dollar weakness will be very positive, for emerging markets. So the prospects of outperforming developed markets is quite good in the short term as well as in the long term.

Brilliant. Thank you so much. Maybe we could now spend some time unpacking the composition of the emerging market benchmark, along with the fact that there is such great volatility between different countries performances.

So the emerging market benchmark has changed significantly over the last 15 or 20 years. You’ve had commodity export countries like Brazil, South Africa and Russia going from almost 30% in the benchmark to below 10%. And they’ve really been replaced by India and China, who has very strong domestic economies and internal drivers. The divergence in country performance, actually, one of the main reasons it’s easier to generate alpha in emerging markets, because every year there’s a 50% gap in the dollar performance between the top and the bottom performing countries. So if you just look at recent examples, last year, the rally in South African markets started with the GNU. With Asia stocks rallying this year, Naspers gold and platinum. As continued to rally, China was still an investable gold and investable at the start of last year. But their bull market started in April. India was still doing very well last year. And you’ve had markets like Korea and Brazil really underperform in 2024, and Brazil’s underperformance has continued into 2025. Apart from a rally in financials at the start of the year. So this big gap in performance provides opportunities for us to allocate between countries. So we could, for example, take some profits in China more recently as well as in Korea, and rotate that into other markets like India. India has experienced the biggest amount of underperformance of last few decades.India’s market was extremely expensive. It was more than 100% premium to em, but that has shrunk now to 60%. So we’ve, trimmed our underweight in India from almost 10% to 6% or less. And we’ve also bought into the Brazilian equity market. Real rates are almost 10%, which is not a conducive environment for consumption and GDP growth. And it leads to very depressed multiples.

We think there’s scope for them to ease monetary policy, which will be very good for the economy as well as, the equity market. So there’s always these opportunities to shift between markets in EM. Thank you so much. That’s really informative to our audience.

Thank you so much for tuning in and look forward to seeing you next time. Thanks so much.