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Weekly Manager Views: Equities

05 May 2020

At GAM Investments’ Weekly Equities Meeting held on 4 May, Tim Love provided an update on emerging market (EM) equities and shared his outlook for the asset class.

Tim Love - Emerging Market Equities 

Currency volatility in EMs is already a cyclically significant risk for the asset class; Covid-19 has clearly added to FX risk this year. At a time of such market stress, we believe it is crucial to stick to top-down models (analysing macro influences) and fundamental bottom-up valuation screening. We continue to find select investment grade (IG) and environmental, social and governance (ESG) plays appealing.

Overall, investor positioning in EM equities was light across the board going into the Covid-19 crisis and it is even lighter as a result of it. However, in our view, EMs have learned from the 1997 Asian crisis and global financial crisis (GFC) and the asset class has morphed into a domestic demand story with new world economies. This is especially the case in China. We believe upside will come quickly to those with a long history of recovering from market downturns, especially the more severe ones, triggered by black swans such as Covid-19, North Korea and sanctions on Russia. We believe a more cyclical orientation at stock, sector and country level makes sense with disciplined risk management, portfolio construction and no style drift.  

One major concern is a potential unwinding of the US / China trade agreement. Such an event is a systemic risk to the global economy and would carry negative consequences for the renminbi. The run up to the US election in November may set a dangerous tone for US / China trade and heighten geopolitical risk. Ultimately, we hope cooler heads prevail.

Overall, we maintain a positive outlook on this laggard IG asset class appealing to value, growth and yield investors. The EM equity index composition has materially altered to make it more resilient in its earnings per share (EPS) generation and less US dollar / top down sensitive to risk on / off flows. It is increasingly beating to the drum of domestic consumer demand and domestic command economies, especially in China. In the medium term, we believe a patient investor will be rewarded for buying this asset class on both tactical and secular logic.

 
Important legal information
Source: GAM unless otherwise stated. The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. May 2020.