While returns of recent years have been disappointing for investors of emerging market (EM) equities, the asset class is ripe with opportunities, driven largely by a compelling case for India, according to head of global emerging market equities for abrdn, Devan Kaloo.
Mr Kaloo said despite the asset class being under-owned by local and global investors, the global asset manager remains ‘cautiously optimistic’ about EM equities.
“It continues to present a fascinating range of opportunities for active investors, and India in particular is one of the best long-term stories in the sector, with a number of factors working in its favour.
“Prime Minister Narendra Modi has done a good job at continuing the infrastructure projects which commenced under the previous administration. Today, everyone has a digital financial network and access to money, which has been transformational.
“Perhaps more critically, India is a strong beneficiary of the US/China tensions, and we’re seeing many companies shifting production and manufacturing into India which will only likely increase from here. It will lead to a ‘who’s best friends with India’ scenario,” he said.
However, Mr Kaloo said the main issue plaguing investors is India remains expensive, relative to other EM jurisdictions. He said a potential investment rally in China will likely see some rotation out of India and into China.
“We do remain cautious about current levels in India, and if there was to be some rotation into China, India would effectively become cheaper and we would look to add to our exposure there,” he said.
Commenting further on investment positions across the EM equities sector, Mr Kaloo said the asset manager would more than likely be increasing – rather than reducing – it’s exposure to China in the short to medium term, remaining undeterred about the fallout in the property market.
He said despite this, there are still issues within China that need to be resolved with the external trading environment remaining difficult for many companies.
“We’re keen on companies with clear earnings visibility over the next two plus years. I’m sceptical about the plausibility of a soft landing in the US. The US Fed funds rate has gone up 500 basis points – it’s not going to be consequence-free for that economy. It’s a much tougher operating environment so you want companies who have the ability to deliver earnings.
“The dollar, earnings per share and China not stabilising is a problem and you can’t get away from it, but on those three things, we’re relatively positive and believe we’re at an inflection point,” he said.
Mr Kaloo points to a Taiwanese semiconductor manufacturing company as an example of a company with clear visibility of earnings.
“It dominates the chain – regardless if you’re talking about AI, increasing handset rollouts or investment in digitalisation, they make the chips that go into that, and are a very good investment play.
“We see them navigating the US/China tensions very well, and for the company and other like-companies who can steer clear of the geopolitical issues, it means they have sizable capability to invest.
“Also, the stock is cheap, and with a rerating of US companies, it continues to trade at good multiples while giving investors good exposure to the tech recovery story,” he said.
