Outlook 2018 - Emerging market equities: More to come?

Outlook 2018 - Emerging market equities: More to come?

Following years of lacklustre performance, emerging market equities commenced their ascent in 2016. With 2018 upon us, the extent to which the rally can be sustained is front of mind for many investors.

What is your investment outlook for emerging market equities in 2018?

There are good reasons to believe emerging market equities can continue to perform well in the year ahead. The impressive run in 2017 was set against a backdrop of better economic data, less pronounced dollar strength, stronger local currencies and more robust commodity prices. These factors, coupled with EM earnings growth and an improvement in profitability, have helped to restore confidence.

Chart 1: Emerging market equities impressed in 2017

Source: Fidelity International, DataStream as at 31 October 2017

Despite a period of superior performance, it is critical to highlight that EM is rising from a very low base, and with a heavy valuation discount to developed market equities, the asset class remains attractive.

Policy developments across the major economies of the developing world bode well. In India, Modi’s reform agenda continues to progress. In China, aspects of government policy are encouraging, with environmental and state-owned enterprise (SOE) reform amongst the areas to watch.

The implementation of bold changes should drive greater economic stability over the medium to long term. More broadly, measures to address housing issues in India (under the banner of 'housing for all') and far reaching healthcare reforms in China can provide us as stocks pickers with multi-year growth opportunities.

What do you think could most surprise investors next year?

Some sectors in emerging markets have experienced strong bouts of performance in 2017, such as technology stocks. Whilst certain internet companies have demonstrated their ability to grow at a rapid pace and will provide worthwhile investment opportunities over the next five years, I anticipate a pullback in the shorter term.

With equity market volatility at particularly low levels, a sell off may come as a surprise to many investors. Given my long-term horizon and extensive experience of this volatile asset class I would not be perturbed by such a move, indeed it could represent a good buying opportunity.

How do you plan to capture the best opportunities and add value for investors?

Whilst the backdrop has improved, selectivity and discipline remains critical. I consistently focus on identifying companies with robust business models to maximise returns. Market leaders in their respective segments that can deliver sustainable earnings and cash flow are the most compelling opportunities. When these companies perform well I remain disciplined, actively taking profits and re-investing in companies which can offer attractive returns.

I continue to believe in the purchasing power of emerging market consumers, and consequently I invest in many consumer-related businesses across a range of segments. IT is also an area where I am well exposed. Beyond the emerging market consumer and IT, I am marginally positive on the materials sector. I alluded to Chinese policy previously - this is an area I will continue to monitor closely given that some of the companies I own in the portfolio should distinctly benefit from China’s efforts to cut excess capacity and curb pollution.

I reiterate that the fund’s sector allocation is a result of my bottom-up stock picking. Any sector exposures will depend on the number of attractive investment opportunities available within it.

NICK PRICE is the lead Portfolio Manager of Fidelity International’s emerging EMEA franchise. Nick has led the development of Fidelity’s emerging markets equity investment team since 2005. In addition to EMEA, Nick is responsible for the management of our Global Emerging Markets equity disciplines.

Nick draws on Fidelity’s extensive emerging market equity resources, which include specialist portfolio managers and 51 research analysts.

 

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