Portfolio Manager John Paul Lech analyzes today's opportunity set in global emerging markets.
Q: With U.S. markets so strong, what's the rationale for emerging markets?
We believe the number of great companies poised to come out of emerging markets is increasing, in terms of absolute number and also magnitude of impact. The MSCI Emerging Markets Index is starting to reflect this dynamic. Having undergone drastic changes in the past decade, it now includes companies at the forefront of important global developments, including health care and technology firms that are closely aligned with how consumers make economic decisions in coming years. This positive trajectory is a key reason in our view for investors to include an allocation to EM as part of any well-rounded portfolio.
Q: Where do you find opportunity amid the nascent economic recovery?
Overall, economic recovery is of course a good thing. At the individual company level, though, it's more complex. A business could disproportionately benefit from changes in consumption patterns that have occurred during pandemic-related lockdowns and restrictions—as life goes back to normal, it could actually do worse. Likewise, depending on the trajectory of the recovery, companies that were suffering amid the lockdowns could suddenly experience a quick acceleration in earnings and profits. It really is company by company, so it's important to understand how external stimuli might impact the earnings, profitability and prospects of the companies.
Q: Sentiment toward emerging markets can shift based on news headlines and other short-term inputs. What's they key to staying invested and unlocking growth?
An active approach to security selection, as well as maintaining a long-term time horizon, are essential to unlocking the growth potential of emerging markets. Regarding market timing and the choice to stay invested, few people can consistently time the markets. There is a lot to be said for the old adage, “It's not about timing the market, it's about time in the market.” Additionally, we should remember that the longer your time horizon, the less risky equities are because of the value of compounding.
Q: Looking ahead, what themes are you following in EM?
Our team is watching the acceleration of trends which were already unfolding pre-pandemic. We're also watching for a K-shaped recovery where some businesses are catalyzed by the recovery and others are losing ground. In our view, the real action is below that broad-based earnings narrative. We learn a lot by reading and engaging broadly, including things specific to markets, but also anything that might be helpful in understanding how people work, how they think, what their motivations are and how their purchasing behaviors are changing. Adaptable companies with talented management teams and competitive market positions in their industries are more likely come out stronger on the other side of the pandemic.
MSCI Emerging Markets Index: Captures large and mid-cap representation across 24 Emerging Markets (EM) countries. With 1,138 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.
The views and information discussed in this report are as of the date of publication, are subject to change and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
You should consider the investment objectives, risks, charges and expenses of the Matthews Asia Funds carefully before making an investment decision. This and other information about the Funds is contained in the prospectus or summary prospectus, which may also be obtained by calling 800-789-ASIA (2742). Please read the prospectus carefully before you invest or send money as it explains the risks associated with investing in international and emerging markets. These include risks related to social and political instability, market illiquidity and currency volatility. Investing in foreign securities may involve certain additional risks, exchange rate fluctuations, less liquidity, greater volatility and less regulation. Fixed income investments are subject to additional risks, including, but not limited to, interest rate, credit and inflation risks. Single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of a concentration in a specific sector or geographic region. Investing in small companies is more risky and more volatile than investing in large companies.
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