Likewise, Michael Oh, portfolio manager at Matthews Asia, looks to China to help fuel the returns of the Matthews Asia Innovators Fund, essentially an emerging markets fund that he co-manages. As of the third quarter, the fund was overweight China by about 18% against its bogey, the MSCI All Country Asia ex Japan Index, and had big overweight tilts to the consumer discretionary, communications services and health-care sectors.

“China has a lot of innovative companies that are creating high value-added services and products for the domestic economy, and that’s where the exciting growth story is,” Oh explains. “China has shown during the past 20 years it’s able to develop companies able to serve domestic consumers.”

Pandemic
The Covid-19 pandemic originated in China, but that country and its northern Asian neighbors by and large have weathered the storm much better than the U.S. and Europe. Consequently, the Asian regional economy has recouped much of its pre-Covid levels. Still, the pandemic will continue to impact emerging markets for the foreseeable future.

“The pandemic is speeding up consumer behavior changes in China and other developing Asian countries by pushing them into using more online services,” Oh says.

He adds that the pandemic was a wake-up call for China to strengthen its health-care infrastructure, so Oh foresees health care as a boom market in the making there.

In its late-October report on emerging markets, UBS noted that Asian countries—except for India—generally have the Covid-19 pandemic under control while many other EM nations are still struggling with the virus’s spread.

“Growth recovery will likely be driven by further economic reopening, which will depend on the discovery of effective therapeutics and vaccines against Covid-19,” UBS said in its report.

It also stated that key risks to EM equities include growing U.S.-China tensions, a possible second Covid-19 wave leading to renewed national lockdowns, a stronger U.S. dollar, and the vulnerable fiscal accounts of EM economies following the rollouts of unprecedented fiscal stimulus packages.

“Covid will lead to fiscal pressures, and we’ll see the cost of the pandemic play out in different ways during the next few years,” Kapoor says. “China, Korea and Taiwan have spent a lot less than what the U.S. and some other countries have done. I think that’s a tailwind for those countries.”

And that speaks to the vagaries of emerging markets (of course, developed markets have their vagaries, too).

“It’s not like EM as a whole is great,” Kapoor says. “There are 1,400 stocks in our index, and we own 50 of them. We’d like to own more, but it’s hard because there are a lot of problems.”

Dara White from Columbia Threadneedle echoes that thought. “The big story is that emerging markets is a stock picker’s market and it’s a secular universe with a lot of high-quality companies,” he says, adding it also contains a number of countries investors should avoid.

“We’ve had no exposure to Turkey since the failed coup [in 2016],” he says. “We have no exposure to the Middle East in general. We have no exposure to Mexico. Turkey and the Middle East in particular is an area where politics make it almost uninvestable.”

All three emerging markets funds mentioned in this article have solid long-term records that have outperformed their bogeys. The somewhat similar nature of their portfolios in terms of sector allocations, country weightings and top company holdings conveys the message that less is more in emerging markets.

“The investable universe is the BRIC [Brazil, Russia, India and China] countries,” Kapoor says. “It’s Korea and Taiwan. And there are certain one-off plays in other countries. But for the most part, the investable countries is a much smaller subset.”   

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