Criss-Crossing Emerging Markets in Search of Opportunities

Criss-Crossing Emerging Markets in Search of Opportunities

Elle Wu
I’m Elle Wu, a client portfolio manager here at Thornburg Investment Management. I’m sitting here today with Charlie Wilson, co-PM of the Emerging Market Equity Strategy. We’ll be discussing the different countries and regions that form emerging markets. Something that is top of mind for us today here in emerging markets, of course, will be China. So, what a difference a few months make. I mean, can you believe that China has lifted its COVID policies? What do you think of what’s happening on the ground today?

Charlie Wilson
Oh, absolutely. I mean, if we were talking two months ago, three months ago, I would not have expected a pivot that’s as dramatic as what we’ve seen in China. Their move away from zero-COVID policy seemed like it happened almost overnight. We had reports from companies that we follow in China that 70, 80% of their office were out sick during a six-week period in December and early January.

And so, it’s really showing how rapidly the virus has moved through the country. I think the good news is that it’s because economic activity was so weak last year due to the zero COVID policy. It’s a low base and so it’s going to be very easy for China to really see an acceleration in growth this year. Many economists are expecting greater than 5% GDP growth this year, and it’s really just lapping the easy comps from last year.

The important thing is that because China is such a large economy and we’re seeing this acceleration, it really is going to be an important global driver of the, you know, the world GDP growth this year.

Elle Wu
Anything specifically in terms of policies on the ground that you want to touch upon or anything that makes you more bullish about China?

Charlie Wilson
You know, honestly, I just think, you know, China’s trying to do the right thing to clean up their property market issues. They’re both stimulating demand, they’re allowing second home purchases in some markets. Or subsidizing mortgage rates. They’re doing their best to provide liquidity to developers that are struggling. I think that’s been an overhang on the economy there, they’re working to clean that up. But honestly, the biggest thing is people just getting out to work and play again. And that’s really going to drive economic growth. And I think expectations for China are relatively low valuations. Not universally, but more in the H-share market. The offshore part of the Chinese equity market is still very attractive, even though we have seen a bounce off the bottom, looking out one or two years the multiple are still very attractive, especially relative to developed markets.

So, you know, we still see China as a very interesting opportunity on a medium-term basis.

Elle Wu
So, both China and Brazil have had historic presidential elections last year, but what a divergence both countries have taken since. What have you seen in Brazil since Lula has become president?

Charlie WIlson
Yeah, I would say that it’s been a bit unexpected. You know, when we when we went into the election, it was a very tight election, and it was by no means a broad mandate for Lula’s left leaning agenda. And what we’ve seen since he’s taken office is he’s really taken a hard left pivot to try to push some more of his populist policies.

I think we had expected the Senate to be more of a check initially than it has been. But I think longer term, given the right tilt in the Senate, we would expect that to sort of bring the most aggressive parts of Lula’s agenda back into the into the middle. What I would say, though, is the opportunity, and the reason why we think know Brazil could be a great story this year and next is the fact that valuations are really at multi-decade lows. So even though Brazil was a decent market overall last year, that was primarily driven by the commodity companies and the banks, which benefited from high interest rates. But the rest of the Brazilian index has really suffered, and valuations are quite compressed. And I think the medium-term outlook for Brazil is still quite strong. So, we’re quite optimistic about the opportunities we’re seeing there.

Elle Wu
So, one reason that investors may not know as well, but someplace that you and your portfolio manager, Josh Rubin have been to is the Middle East Can you tell us about your travels there, what you’ve seen, what you think?

Charlie Wilson
Yeah, I mean, I think this is really an undiscovered gem or, you know, an interesting area of emerging markets that we’re going to see be a driving influence over the next decade. I know a lot of people think about it as just purely tied to oil and oil revenue and generally having unsustainable government growth models, which is built on turning oil revenue into subsidies for consumption and really, you know, through government handouts. And I think what we’ve seen through our travels is that the governments in the region recognize that’s not sustainable. First of all, that oil revenue is not maybe not going to be around as long as they might hope. And secondly, they have a lot of people they need to employ, not purely through government handouts.

And so, they’re working on new business that they can bring to the region, tourism as a as a big focus, monetizing low-cost energy resources for other industries like way for manufacturing, for example, both for solar, also for logic, semiconductors. So, they’re really utilizing high, you know, their low-cost energy resources to monetize that for higher value add, if you will, and to create jobs and to bring people to the region really to drive that economic growth. And so if you look at it today, they have the resources, they have the economic resources to make this transition they also have, you know, other things that they can add to the global manufacturing footprint. So, take the European situation, for example. They’ve lost access to low-cost gas. They’re looking for other sources where they can relocate some of their manufacturing capacity. And this would be a perfect option for them. And you’re starting to see that type of relationship develop. And it’s for all these reasons, we think that there’s a really sort of fertile investment landscape that’s starting to develop there. And we’re really excited about the opportunities we’re seeing.

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