Emerging markets faced a confluence of challenges in 2022 that resulted in a dramatic derating of the asset class. However, an increasingly supportive environment, led by China’s earlier-than-expected economic reopening, signs of moderating inflation, and a weaker dollar, is encouraging. Against this backdrop, Fidelity Emerging Markets Limited (LON:FEML) portfolio manager Nick Price outlines the areas of opportunity that he is currently seeing among high-quality companies that he believes are trading at compelling valuations across these diverse markets.
China’s reopening rebound
As China reopens following three years of strict Covid curbs, we expect to see a strong consumer recovery on the back of high levels of excess household savings and cheap mortgage rates. We are also seeing a considerably more accommodative regulatory backdrop than that witnessed throughout last year, with Chinese policy expected to remain supportive throughout 2023.
As the largest single market in our universe, China plays a central role in influencing sentiment towards the emerging market asset class and in driving the performance of the index in aggregate. With the country in full reopening mode, we expect the outlook for emerging markets to continue to improve.
At the end of last year, with signs that Beijing was beginning to ease policy, we started to add to China, and continued to do so after it became clear that the country was abandoning its zero-Covid policy. We made additions across a series of names including internet stocks, re-opening plays, and small allocations to real estate related businesses.
Emerging opportunities in financials
At the sector level, financials remain our overweight positive relative to the MSCI Emerging Marketing Index. A more hawkish European Central Bank is giving rise to new opportunities in Central Eastern Europe, where we see selected opportunities given cheap valuations and decent dividend yields. An example here would be Austrian bank Erste Group. While we are nearer to the end of the rate rising cycle than the beginning, rates are likely to remain higher than the preceding five years, which benefits net interest margins for overcapitalised, deposit-heavy banks.
Navigating what lies ahead
Over the past decade we have fine-tuned a strategy that utilises a suite of investment attributes to uncover opportunities in this vast universe. The ability to complement long investments with carefully selected short positions provides additional sources of returns and is supported by our extensive global network of research analysts. For the long investments, we are resolutely focused on identifying dominant franchises that can take advantage of structural growth opportunities. For short positions, we target the weakest stocks most exposed to competitive threats and financial distress.
While the asset class and portfolio have faced headwinds over the past year, we are broadly constructive about what lies ahead. Emerging market equities are cheap both on an absolute and relative basis and are currently trading at a deep discount relative to history. We believe the recent weakening of the dollar and China’s strong reopening story will also be supportive for emerging market assets.
In an uncertain market, our emphasis remains on what we do best. We continue to cast the net wide and look for opportunities in areas of the market that offer up quality at an attractive price.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
