Insights

Emerging markets: volatility doesn’t disrupt the process

Following the recent challenging period we felt it prudent to communicate our views. Since the end of Q321 our Emerging Markets Opportunity strategy has experienced volatile performance, coinciding with considerable market volatility. We have made mistakes and we feel the market is making mistakes too. Recently we have witnessed a significant style rotation away from growth to value (Figure 1)
Figure 1: MSCI Emerging Markets growth-to-value relative total return index (US$)
Total return index

Source: MSCI, as at February 2022

Given our focus on quality growth, this extreme value rotation has been a headwind. Reassuringly, we have experienced similar situations in the past and focusing on our investment process has been key to our long-term success: in late 2016, following the election of Donald Trump, and in the second half of 2018 following increased rhetoric around US-China trade relations, macro concerns overshadowed the compelling fundamentals of solid businesses, and the broader emerging market equity asset class witnessed a similar growthto-value rotation. These were the only periods in the history of the strategy when mitigating downside risk was not strong. But through focusing on quality and valuations through these periods, we were ideally positioned for the market recovery and the subsequent periods of outperformance in 2017 and 2019 – a testament to our approach. It is also important to note that when value rotations are not extreme the strategy has maintained outperformance of the market.
In this current period, macro volatility has been dominating emerging markets and overshadowing fundamentals. More specifically, the volatility has been the result of a wideranging group of events and issues including the regulatory reset in China, the impacts of Covid-19 policy, Brazilian macro, inflation concerns, monetary tightening and, most recently, the Russian invasion of Ukraine. Since we are bottom-up, fundamental investors this has been challenging, but we remain firm in our view that over the long term earnings drive stock markets, and while macro volatility may persist in the short term, focusing on fundamentals will ultimately bear fruit.
In China we felt the market was overreacting to the regulatory reset, and in fact many announcements read like the wish lists of developed market governments, such as antitrust rules or curbing monopolistic behaviour and the use of consumer data by big tech. We believe we are out of the first phase of regulation in which the equity risk premium from domestic regulation feels priced in, and are moving to the next phase in which regulatory rules are applied. This is likely to be less volatile. Policy measures in the property sector are showing signs of easing, such as the relaxing of mortgage availability, which is also incrementally positive. Furthermore, given that 2022 is an election year in China we expect moderate monetary and fiscal easing as opposed to large stimulus – and this is what we have seen so far. In our opinion, China’s zero-Covid policy has been a constraint on the economy and we are monitoring progress in this area.
The macro environment in Brazil was challenging in 2021, with fiscal worries from pandemic spending, inflation and interest rate concerns, and election uncertainty all weighing on sentiment. While we remain tentative given the macro dislocations created at stock level, we remain constructive on Brazil over the long term due to the change in entrepreneurship as well as the types of companies and business models coming to market. Current valuations reflect elevated macro risk, which in our view is close to peaking. We felt the central bank did the right thing in the face of rising inflation. You only need to look to Turkey for the opposite playbook, but this action did restrain the equity market. Signs that the interest rate hiking cycle is coming to an end, as well as collaborative comments from both parties, have eased election concerns. With hindsight we could have reduced our Brazilian overweight sooner last year, but interestingly it has been one of the stronger markets so far this year.
Russia has certainly been a black swan event. As we entered 2022 our base case was a likely annexation of eastern Ukraine and possible sanctions. As such, in January we exited our position in Sberbank. While the Russian invasion was an identified tail risk, we didn’t expect it to materialise. Following the invasion we began the process of exiting all exposure as best we could in the face of liquidity constrains and market restrictions. Thankfully, our remaining exposure was small and has subsequently been written down – less than 40bps. As anticipated, this week Russia was removed from the EM universe.
It is clear that macro variables have weighed on the market over the short term, causing a derisking of the universe with the resultant selling creating massive dislocations at the individual stock level. This in turn has led to poor stock performance on a short-term basis. We remain focused on our fundamental and valuation work. The post-war environment will have an impact on inflation, pushing food and fuel prices higher, which will put pressure on the consumer both in emerging markets and globally. In this environment, we are increasing our exposure to inflation beneficiaries such as financials and commodity producers, while still focusing on structural growth opportunities, emphasising a “barbell” portfolio to benefit in the current environment. We have been in this situation before and, while it may be challenging in the eye of the storm, our philosophy and process have guided us and ultimately prevailed in similarly volatile times.
31 March 2022
Dara White
Dara White
Global Head of Emerging Market Equities
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Emerging markets: volatility doesn’t disrupt the process

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In the Middle East: this document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). This document is intended to provide distributors with information about Group products and services and is not for further distribution. The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

columbiathreadneedle.com

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing communication.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In the UK: Issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In the Middle East: this document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). This document is intended to provide distributors with information about Group products and services and is not for further distribution. The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other Person should act upon it.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

columbiathreadneedle.com

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