John Moorhead

Several factors point to a stronger year ahead for emerging markets, where select country share market gains could outpace those in the US and other developed nations, says John Moorhead, head of global emerging markets at Maple-Brown Abbott.

These include a likely peak in interest rates, lower inflation and attractive equity valuations, which could see investor capital flow to emerging markets.

Mr Moorhead believes emerging markets are at a turning point after hitting a 35 year low relative to the US share market.

“The last decade was relatively challenging for any market outside the US; the next decade is likely to be better for emerging markets, a number of which are showing higher growth and higher real interest rates than developed nations, suggesting a turn in the cycle could come soon.

“Select emerging markets are well ahead of developed markets in raising interest rates and they are also ahead of the curve in fighting inflation. We think we’ll see capital flows pick up in key markets, which will likely strengthen their currencies and help to lower inflation further. We could potentially then see more rate cuts in emerging markets, which would support local economies, corporate earnings growth and share markets,” he said.

The strength in Latin America and Eastern Europe stands out, where Maple-Brown Abbott believe share markets have some of the greatest potential.

“For instance, while China may appear cheap at 9-times price-to-earnings (P/E), other markets such as Greece trade on less than 5-times price-to-earnings (P/E). More important than valuation alone is the direction of change. Corporate earnings in China continue to disappoint in aggregate. While we are finding some opportunities in China where valuations are cheap and company fundamentals are strong, the overall negative changes leave us cautious on China at a country level.

“Greece, on the other hand, is undergoing a renaissance in terms of its economy and corporate earnings and therefore has one of the highest positive change scores across the universe,” he said.

The chart below shows Maple-Brown Abbott’s preferred emerging market opportunities at the country level based on three distinct criteria: value, quality and change.

Source: Maple-Brown Abbott, April 2024.

Mr Moorhead says while India has generated a lot of attention in the past year, and its corporate and economic fundamentals are strong, this is more than offset by very high share market valuations. Bloomberg consensus data has India’s share market on 23-times next year’s earnings, compared to about 12 times for the broader MSCI emerging markets.

More recently, the Chinese equity market has been supported by a quarterly earnings season that saw an increase in the number of corporates announcing shareholder-friendly capital management policies. Outside Asia, Turkey was a standout market with a 14% gain (USD terms). The market strength was supported by foreign investor inflows as investors are positive on the Government’s pledge to maintain orthodox economic policy.

Mr Moorhead pointed out that emerging markets are idiosyncratic and encompass higher investment risk, so experience, active management and bottom-up research count.

“We can invest across a universe of 3,000 listed companies within a 24 country cohort, with each of those countries going through their own phase of economic development and shorter-term economic cycles. We apply a bottom-up approach and look at individual businesses and industries based on our three key metrics of value, quality and change.

“Focusing on the impact of cyclical and structural change on companies, we use a rigorous and repeatable process to construct a concentrated portfolio which captures the opportunities offered by the dynamic nature of emerging markets,” he said.

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John Moorhead

Several factors point to a stronger year ahead for emerging markets, where select country share market gains could outpace those in the US and other developed nations, says John Moorhead, head of global emerging markets at Maple-Brown Abbott.

These include a likely peak in interest rates, lower inflation and attractive equity valuations, which could see investor capital flow to emerging markets.

Mr Moorhead believes emerging markets are at a turning point after hitting a 35 year low relative to the US share market.

“The last decade was relatively challenging for any market outside the US; the next decade is likely to be better for emerging markets, a number of which are showing higher growth and higher real interest rates than developed nations, suggesting a turn in the cycle could come soon.

“Select emerging markets are well ahead of developed markets in raising interest rates and they are also ahead of the curve in fighting inflation. We think we’ll see capital flows pick up in key markets, which will likely strengthen their currencies and help to lower inflation further. We could potentially then see more rate cuts in emerging markets, which would support local economies, corporate earnings growth and share markets,” he said.

The strength in Latin America and Eastern Europe stands out, where Maple-Brown Abbott believe share markets have some of the greatest potential.

“For instance, while China may appear cheap at 9-times price-to-earnings (P/E), other markets such as Greece trade on less than 5-times price-to-earnings (P/E). More important than valuation alone is the direction of change. Corporate earnings in China continue to disappoint in aggregate. While we are finding some opportunities in China where valuations are cheap and company fundamentals are strong, the overall negative changes leave us cautious on China at a country level.

“Greece, on the other hand, is undergoing a renaissance in terms of its economy and corporate earnings and therefore has one of the highest positive change scores across the universe,” he said.

The chart below shows Maple-Brown Abbott’s preferred emerging market opportunities at the country level based on three distinct criteria: value, quality and change.

Source: Maple-Brown Abbott, April 2024.

Mr Moorhead says while India has generated a lot of attention in the past year, and its corporate and economic fundamentals are strong, this is more than offset by very high share market valuations. Bloomberg consensus data has India’s share market on 23-times next year’s earnings, compared to about 12 times for the broader MSCI emerging markets.

More recently, the Chinese equity market has been supported by a quarterly earnings season that saw an increase in the number of corporates announcing shareholder-friendly capital management policies. Outside Asia, Turkey was a standout market with a 14% gain (USD terms). The market strength was supported by foreign investor inflows as investors are positive on the Government’s pledge to maintain orthodox economic policy.

Mr Moorhead pointed out that emerging markets are idiosyncratic and encompass higher investment risk, so experience, active management and bottom-up research count.

“We can invest across a universe of 3,000 listed companies within a 24 country cohort, with each of those countries going through their own phase of economic development and shorter-term economic cycles. We apply a bottom-up approach and look at individual businesses and industries based on our three key metrics of value, quality and change.

“Focusing on the impact of cyclical and structural change on companies, we use a rigorous and repeatable process to construct a concentrated portfolio which captures the opportunities offered by the dynamic nature of emerging markets,” he said.

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Sophia Rahmani

Maple-Brown Abbott has launched a global emerging markets equity fund, managed by John Moorhead.

The Maple-Brown Abbott Global Emerging Markets Equity Fund is invested in companies listed across global emerging and frontier markets and is actively managed. The Fund is managed on a ‘benchmark unaware’ basis, provides exposure to a concentrated portfolio of companies most likely to benefit from cyclical and structural change and typically holds 30–40 stocks. The Fund aims to outperform the MSCI Emerging Markets Net Index (AUD), after fees, over a five-year period.

CEO and managing director Sophia Rahmani says investing in global emerging markets provides investors with the opportunity to gain exposure to some of the largest and fastest growing economies globally.

“In the past 20 years, emerging markets have risen from a quarter of world GDP to now close to half, while its equity markets are still a fraction of the size of those in the developed world.

“After the longest bear market since their inception, emerging markets today appear to be offering an abundance of compelling investment opportunities. Company management teams and business models have been stress-tested in recent years, with many coming through in stronger operating positions, and at attractive valuations.”

John Moorhead, head of global emerging markets, said the core belief underlying the investment strategy for the new fund was the need to focus on both structural and cyclical change as the driver of cash flow, valuations and, ultimately, longer-term share price returns.

“By placing change at the core of our philosophy, we seek to better identify and understand these shifts and how they will play out over our multi-year investment horizon. We believe the ideas capable of having the biggest impact are found at the intersection of our focus on change, our bottom-up, in-house industry research and our proprietary screen.

“When looking at companies likely to benefit from cyclical and structural change, we believe it is important to focus on sustainable returns. For us, this means understanding that the long-term return potential is impacted by the business practices of management teams and owners, including their relationships with all their stakeholders, such as employees, customers, suppliers and local communities.”

Mr Moorhead added the Maple-Brown Abbott Global Emerging Markets Fund may be appropriate for investors who are seeking capital growth with an investment horizon of at least five years, a very high risk tolerance and are comfortable with the risks associated with investing in global emerging markets.

“In our view, a diversified investment portfolio benefits from an allocation to global emerging markets. Emerging market companies provide investors with a unique opportunity to access long-term trends including growing middle class consumption, evolving demographics and the energy transition. Given the wide range in companies, valuations and macroeconomic factors, we believe that active management (that is, active stock picking) is crucial when investing in global emerging markets.”

Ms Rahmani said that while the global emerging market equity strategy was relatively new for Maple-Brown Abbott, there was deep and diverse investment experience in the Asia and Emerging Markets team, including 20 years’ experience investing in Asia and Mr Moorhead having previously worked as Head of Emerging Market Equities at Pictet Asset Management in London, where he worked for 13 years.

“We believe having someone of John’s calibre managing the strategy and our multicultural and multilingual investment team being based together in Sydney gives us an advantage.”

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John Moorhead

The re-opening of China and the performance of the United States (US) economy will be the two dominant themes for global equity markets in 2023, particularly emerging markets, according to portfolio managers at Maple-Brown Abbott.

John Moorhead, head of global emerging markets, said China and the US will largely dictate how markets will play out for investors over the next 12 months.

“We are optimistic on the outlook for China and believe there is a number of attractive opportunities for investors.

“After close to three years of a zero COVID containment policy, China has now started opening up and this will create a strong tailwind for emerging markets. While we expect to see volatility as COVID cases spike, this volatility will also create investment opportunities. Looking further ahead, we expect to see a return in consumer confidence and spending levels.”

Will Main, Asian equities portfolio manager, added that many investors are still overlooking China.

“Having been in a bear market for the past two years, where China’s equity market fell 63 per cent (at the trough), investor apathy towards the region is high. However, there are strong signs the market has bottomed and, as markets continue to climb, ‘animal spirits’ will take over and investor interest is likely to revive, which will provide further support for the China market.

“One area for investors to keep an eye on is company valuations. One reason for China’s (and the region’s) soft returns over the past decade has been subpar capital allocation. The consequence has been weak earnings per share (EPS) growth (despite decent net income growth) due to higher share issuance. A key feature of 2022 was the increasing levels of buybacks from corporates across the region. Given depressed valuation levels, this is an astute use of capital and we expect the market to reward companies by marking up valuations.

Mr Main and Mr Moorhead agree that the likelihood of a US recession and falling demand for emerging market exports is a real risk for global markets.

“Despite low valuations and generally low levels of current profitability, a recession in the US, or the European Union (EU), would result in weaker top line growth and dent the broader recovery,” Mr Main said.

“Whether the Federal Reserve in the US is still looking at interest rate rises is a big question mark. Asian markets face headwinds in an environment where the USD is strengthening. While it appears that USD strength has peaked, should the US Federal Reserve continue to raise rates above expectations, the region will struggle.”

Mr Moorhead said the question of whether the USD has peaked is key to global emerging markets in 2023.

“Emerging market central banks are ahead of the curve on fighting inflation with many already at positive real rates. If we have seen peak USD, emerging markets could benefit from flows seeking more attractive valuations.

“However, if the US enters a recession, this will trigger falling demand for EM exports. Emerging market economies have historically been reliant on increasing global trade to grow earnings. A US recession, combined with an already weak Eurozone, would be a drag.

“Overall, however, we believe there is reason to be optimistic about emerging markets. A recovery in growth in emerging markets combined with peak US interest rate increases brings a renewed, positive view towards emerging markets,” Mr Moorhead says.

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John Moorhead

Boutique investment manager Maple-Brown Abbott will launch a global emerging markets (GEM) equity investment capability and has appointed John Moorhead to the newly created role of head of global emerging markets. Mr Moorhead is based in Sydney and reports to CEO and managing director, Sophia Rahmani, and CIO, Garth Rossler.

In this role, he will work with senior management to build-out the business’s GEM capability as well as serve as lead portfolio manager and investment analyst. As part of his remit, he will recruit additional investment analysts for the new offering. It is expected that a strategy will be available to investors by mid-2022.

Mr Moorhead was most recently head of emerging market equities with Pictet Asset Management in London, where he led a team of 20 investors managing US$6 billion in assets. He has relocated to Sydney to join Maple-Brown Abbott.

Ms Rahmani said Mr Moorhead’s outstanding track record in GEM equities, as well as his focus on sustainable investing, means he is the ideal person to establish the new capability.

“A key component of our growth strategy is to actively seek opportunities to develop new offerings for investors, both through organic growth of existing capabilities and through acquisition, and GEM is a natural fit for our business.

“We have been managing Asian equities for nearly 20 years and have a deep and diverse investment team. Adding specialist GEM expertise will allow us to broaden our offering to investors, in an asset class where we see significant opportunities.

“Investing in GEM provides investors with the opportunity to gain exposure to some of the largest and fastest growing economies globally. In the past 20 years, emerging markets have risen from a quarter of world GDP to now close to half, while its equity markets are still a fraction of the size of those in the developed world.

“We are thrilled to have someone of John’s calibre and experience joining the Maple-Brown Abbott team and are excited to soon be able to provide a contemporary GEM solution to investors,” she said.

Mr Moorhead said one of the main attractions of joining Maple-Brown Abbott is the long history of investing in Asian emerging markets, backed by a deep and experienced Asian investment team.

“I was also attracted to the culture and institutional grade boutique structure, which provides a strong and supportive platform from which to build a contemporary and high-quality GEM offering.

“Emerging markets offer fertile ground for active management, where rigorous research and a disciplined investment process allows investors to uncover exciting opportunities.

“I plan to take a concentrated approach to investing in GEM by focusing on those companies with the prospect of generating sustainably strong cash returns on capital, run by shareholder-oriented management teams, and purchasing them at a discount to our estimate of fair value.

“Focusing on sustainable returns and valuations is core to my investment approach. It means investing for the long term and looking not just at the ESG risks that can be so important in emerging markets, but beyond that to those companies that can benefit multiple stakeholders to generate those sustainably high returns.

“A global financial centre like London was a fantastic environment in which to work for so long, particularly when learning to navigate the intricacies of investing in markets like Russia, Eastern Europe and Latin America. I’m looking forward to bringing those global learnings to Sydney, where I can invest from an Asian time zone and be closer to the engine of global growth that is emerging markets in Asia,” he said.

Mr Moorhead joined Pictet in 2008 and held the roles of co-portfolio manager and head of emerging markets research before being appointed head of emerging market equities in 2017. Prior to this, Mr Moorhead was with Macquarie Bank as a research analyst, initially in Sydney before moving to London. He started his career as a mining engineer at BHP Billiton in 2002.

He is a chartered financial analyst and has a graduate diploma of applied finance and investment. He also holds a bachelor degree (honours) of mining engineering from the University of Queensland.

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