Five thoughts on value in emerging markets

From Asia’s response to the pandemic to Latin American debt, here are five themes from 2020 that stood out to us as emerging market value investors – and their implications for the year ahead



Juan Torres Rodriguez
Fund Manager, Equity Value
Vera German
Fund Manager, Equity Value

How Asia handled the pandemic

There is really only one place to start any assessment of the past year and, when the Covid-19 pandemic hit, emerging markets as a whole found themselves in a very scary place, in both human and economic terms. On the latter, weaker healthcare infrastructure, weaker borrowing ability and a high degree of informality in the economy all contributed to the threat that decades’ worth of economic progress might be wiped out.

As 2020 unfolded, we saw a dramatic divergence of trajectories between North Asian countries and the rest. One of the key reasons the markets of China, South Korea and Taiwan outperformed last year was they managed to contain the pandemic. That Brazil, India and Russia topped the tables for cases and deaths was not just down to the scale of their populations – they also adopted a less stringent approach to the crisis.

So why was Asia more successful? A lot would appear to boil down to the fact that this is not their first rodeo. Asia’s experience of SARS (severe acute respiratory syndrome) in 2003 and MERS (Middle East respiratory syndrome) in 2015 meant officials in these countries knew what they were facing and reacted more swiftly – lockdowns were quicker and more severe; testing facilities were set up rapidly and extensively.

It is hard to deny more authoritarian systems of government played a part here as the population can be mandated to download and use track-and-trace apps – Singapore, for example, has one of the highest uptakes of such an app in percentage terms. That said, it does also appear that, even in South Korea and Taiwan, which are closer to Europe than to China in their political systems, populations were more compliant.

This is an important consideration for investors because better containment should of course lead to a stronger economy. As such, the prospects for individual emerging economies in 2021 can look dramatically different, depending on the coronavirus case numbers.

China-US trade war

It is no exaggeration to say trade tensions between the world’s two largest economies are having – and, even under a new US president, will continue to have – far-reaching consequences. In the corporate world, 2020 saw a number of concrete manifestations of this – not least, the concerted efforts of the Trump administration to force US investors to divest from several China-listed stocks, allegedly for their military connections.

The US also grew very worried about the growing popularity of Chinese social media platform TikTok – and the associated privacy, security and plain national prestige implications. Months of negotiations have thus far resulted in 20% of Tik Tok Global, which contains the US business, passing to Oracle and Walmart. The remaining 80%, however, remains with ByteDance and thus in Chinese hands.

There is a broader question for investors to ponder in all this: how can we best own emerging market assets while acknowledging the risk of the US cutting anyone it dislikes out of financial markets? When Russian state-owned enterprises were sanctioned in the middle of the last decade, few tears were shed – but China makes up half the emerging market universe and is thus a completely different beast.

Ant Financial’s IPO and changing power dynamics in China

This was arguably the most interesting development for emerging market investors in 2020 as China had hitherto allowed its internet giants to grow more quickly than even the US – and for ages they seemed invincible. Small skirmishes, such as a slap on the wrist for Tencent in 2019 and the official investigation into Alibaba’s counterfeit problem four years earlier, had been quickly brushed aside as minor hiccups.

Set to be the world’s largest-ever IPO in a year where US/China tensions were running high, the floatation of Alibaba’s financial arm Ant Financial was supposed to cement the idea of China’s technological superiority to the US. At the same time, a dual listing in Hong Kong and Shanghai was meant to signal Chinese firms no longer needed US capital, as had been the case with the likes of Baidu, Meituan, Tencent and Alibaba itself.

In the end, none of that happened as the IPO was pulled four days before the shares were to start trading. We will never really know what happened but, as we noted ourselves in Ant-y climax, here on The Value Perspective, the fact Alibaba founder Jack Ma had criticised China’s financial system a couple of days before may or may not have been a coincidence.

It seems likely to have stung the regulators, who had been wary of Ant for a while, as well as the all-powerful Communist Party bigwigs, who are unused to such harsh – or public – criticism. In the months since, we have seen anti-monopoly rules put in place and regulatory fines for acquisitions past and present. It may blow over or it may signal a shift in attitude, suggesting China’s internet giants will no longer enjoy special treatment.

This all matters to emerging market investors for a number of reasons – not least because China’s tech giants, such as Alibaba, Baidu, Meituan and Tencent, are to the MSCI Emerging Markets benchmark index what the likes of Alphabet, Amazon, Facebook and Tesla are to the MSCI World index – big and important constituents. Not holding them as they rise in price can really hurt a portfolio.

More broadly, if this really is the start of a levelling of the playing field in China, then a lot of other sectors may start to look more interesting – banks, shopping malls or indeed any ‘dull’ old-economy stock that may now enjoy a chance to compete more fairly. Finally, can the West really allow China the moral high ground on reining in its internet giants while their US counterparts are allowed largely to do as they please?

Brazil’s hot IPO market

2020 turned out to Brazil’s biggest year for IPOs since 2007 – an odd statistic, perhaps, given the damage the pandemic inflicted around the country and the weak performance of the main Bovespa stockmarket index, which ended the year slightly up in local currency terms, but down in dollar terms. Even so, 28 companies came to market over the course of 2020, raising R$43.7bn (£6.4bn) in total – four times as much as in 2019.

Partly this can be attributed to the ‘equitisation’ of the market as Brazilians sell local debt, which no longer yields much, and switch into equities. Also worth noting, however, is the surge in the country’s retail investor numbers – up fivefold from some 600,000 in 2018 to more than three million now. In a country of more than 200 million people, there is plenty of scope for that number to grow a good deal further.

Brazil is slowly establishing itself as an emerging-market fintech hotspot and its disruptors are opening up the field for first-time investors. While that may mean slim pickings for value investors at present, things can move pretty quickly in Brazil, where both the currency and the stockmarket are more volatile than average – and significant peaks are inevitably followed by significant price-falls.

Ecuador’s debt restructuring

We should say straightaway that this fifth theme is not here to fill space. Granted, we tend not to do debt, here on The Value Perspective; and granted too, Ecuador is a small country and not even part of the MSCI Emerging Markets index. Nevertheless, we would argue this is an important point as it offers a possible template for how emerging-market debt renegotiations might go in years to come.

Very briefly, the problem with emerging-market debt is the seemingly impossible demands the international financial community makes of issuing countries: little external debt, yet enough to create plentiful liquidity; terms that favour the bondholders, yet with enough flexibility so nobody ends up in an Argentina-like impasse; strong economic and political credentials, yet still paying a high yield ... you get the idea.

Such tensions inevitably lead to periodic debt renegotiations – and the associated pain for all involved – so the restructuring Ecuador announced last September was notable in several ways. For one thing, it was quick –ironed out after just six months of negotiations – and for another, it was friendly. There was drama, for sure, but it was cordial and professional and Ecuador even hired a former Mexican finance minister as an adviser.

Finally, it was multilateral. The bondholders included a range of overseas institutions, with the final piece of the jigsaw an IMF loan, on which the support of the private bondholders was contingent. One thing that made this possible was the inclusion of so-called ‘collective action clauses’, which mean changes can be approved by a majority, rather than unanimously, so a few holdouts cannot lead to, well, an Argentina-like impasse.

Why should this matter to equity investors? It matters because, in emerging markets, debt always precedes equity. Establishing a track record and across-the-curve liquidity in debt is usually the required step for a country before it can hope to have a liquid stockmarket with meaningful foreign-money participation. The last time Argentina could not renegotiate its debt, it was relegated from ‘emerging’ to ‘frontier’ market.

On the other hand, a combination of standardised terms and a proven framework raises the possibility of more countries being able to access the international capital markets – and ultimately a greater number of shares for investors to choose from.

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Juan Torres Rodriguez
Fund Manager, Equity Value
Vera German
Fund Manager, Equity Value


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