Adding to EM exposure just now may well be on the reckless side of heroic for many investors, but the following factors I think are useful to bear in mind as and when some of the dust and debris start to settle:
(a) Inflationary expectations (which prompted the stampede from growth stocks to their value counterparts) are still alive and well. And why not with oil popping? Some believe it has further to go. I was reminded by one investor old enough to remember, that it doubled when Saddam Hussain invaded Kuwait. It’s difficult to conjecture about what impact the various measures being taken to plug the gap left by ostracized Russian energy will have. But there is a reasonable argument that high oil prices can be deflationary – when we have to spend more on fuel we tend to spend less on other stuff. Is that what easing US bond yields post the invasion of Ukraine are telling us? Perhaps too soon to tell;
(b) Remember that the whole issue of inflation that has so captivated investors in the developed world is not an issue in China where rates have actually been lowered marginally;
(c) Moving from the macro to the micro, our conversations with our Chinese companies in the last 3-6 months can be summed up as “business as usual” and although Q4 results are not yet out, we do not expect any negative surprises; consumer confidence may have declined but an increasing savings rate reflects future potential;
(d) Nearly all of our Chinese growth stocks that were under the hose in January did not test new lows last week on news of the invasion (we witnessed a similar trend in our European strategy). Does this mean that the shift from growth to value is running out of steam? Who knows, but several of these stocks are showing strong resilience in the face of the Russian invasion. This is an encouraging sign;
(e) The Q4 results from all our Indian companies are now in and have been generally good;
(f) India’s dependence on imported oil is obviously a negative but there are companies which have sufficiently strong franchise to pass on extra input costs to their customers.
(g) Although sentiment remains febrile, EM consumer stock valuations remain very attractive should you be looking to reposition your EM exposure.
Sanctions, dismissed last week as “too little, too late” are multiplying. The international community appears to be acting in concert, the likes of which we haven’t seen for some time. Although Mr Putin may not care about these, he may be surprised and not in a good way.
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