The coronavirus pandemic has amplified the growth trend in emerging market equities. Investors should tread cautiously, focusing on quality companies in developing economies as some segments become increasingly pricey.
“Despite growth’s extraordinary bifurcation with value stocks, we recommend investors embrace greater nuance in thinking through the value versus growth debate,” Justin Leverenz, Team Leader and Senior Portfolio Manager, OFI Emerging Markets Equity team, Invesco, said in a research note.
“Our approach to investing in EM equities maintains a long-term orientation and a focus on differentiated research. We do not have a FOMO gene, which has resulted in an unwillingness to bend to fashion. And, alas, a year of reasonably middle-of-the-pack performance. However, we strongly believe that our continued focus on investing in high-quality companies with durable growth opportunities, sustainable competitive advantage, real options, and appropriate valuations will allow us to avoid common landmines and position us to generate compelling returns over time,” he added.
For instance, Leverenz believes that China could deliver over 50% of global GDP over the next couple years as the rest of the world slowly recovers from the economic impact of COVID-19. China’s resiliency and growth in a year riddled with coronavirus-induced weakness have attracted many equity managers looking for some level of certainty, along with those seeking the flavor of the month pick. Invesco has observed a rapid spike in investor interest for China, especially among those with little experience and no visible mandate investing there, which have fueled pockets of excess.
While Invesco believes the gap between growth and value will collapse, the classic mean reversion approach to value can’t be fully relied upon since many traditional industries face structural risks due to the changing economic environment. For example, e-commerce is an existential threat to brick-and-mortar retailers that are unable to adapt to omnichannel requirements. Fintech companies are persistently eating away at the funding and fee advantages of traditional banks in the emerging markets. Lastly, oil and thermal coal companies face pressure from the ongoing shift to clean energy.
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