Emerging Markets: Widen Your Lens Beyond Trade Tensions

By Morgan Harting

Transcript:

Emerging markets were up pretty sharply through the beginning of May: about 13% for equities, almost 7% for debt. Part of that was because of this consensus that developed that the US and China would reach some agreement on trade and there might be some historic handshake that would resolve their differences.

On May 5th, President Trump tweeted his intention to raise tariffs on Chinese goods, which completely upended that market consensus. So while the underlying growth from emerging companies remains strong, it’s expected that earnings growth will be about 10% this year and next, and that should underpin strong returns for equities and for bonds. The fact is that there is likely to be a lot more volatility along the way, so I think a more risk-managed approach will be particularly important in the coming months.

We’re always looking for investment opportunities that are disconnected from the big controversy of the day, and the great thing about a global emerging-markets portfolio is you have a lot to choose from. So this week people are worried about US-China trade tension, but it happens that today we were reviewing a Brazilian postsecondary private education company. And this is a rapidly growing company in a country that has a growing middle class – a lot of striving people who are eager to get more educated to build their skills in order to live a better life.

And this company has been very focused on improving margins, moving away from a reliance on government-sponsored loans to more of a free market-based model. And they’ve been quite successful. And I think, you know, trading at 12 and a half times earnings, in this case, this is one where you have this great balance of growth and value that is totally disconnected from the big headline of the day.

The exciting thing about investing in emerging markets as well [is that] people can get obsessed or focused on one particular place and the big controversy of the day, [and] that you have more than 50 countries to choose from, particularly if you can look across stocks and bonds – places that are fast-growing, places that are going through structural change and where most investors aren’t paying attention. People are focused on the S&P or the DAX, but rarely on some mid-cap Brazilian or Indian company. And that’s where we can really add a lot of value to investors through our research.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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