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Equities
Emerging market tech firms play a key role in the AI story
As the artificial intelligence story evolves, emerging market tech companies seek to expand their competitive edge in enabling generative AI solutions.
We are believers in the Indian renaissance story but find broad India equity valuations to be excessive relative to underlying fundamentals.
Though China has a growth problem that needs to be addressed, it also has some of the greatest investment opportunities globally, in our view.
We believe a backdrop of lower sovereign US rates may translate into significant outperformance for large swathes of emerging market equities.
China and India are the two heavyweights in emerging market (EM) equities — two continental-size economies that account for approximately 45% of the EM equity benchmark.1 For EM investors, getting these two right matters, particularly after the massive divergence in performance they’ve experienced over the past few years. But getting them right requires a deep understanding of the bigger picture — the narratives that have driven these recent returns have overwhelmed realities, in our view. Here’s how we view the opportunities in each market based on the narratives and the numbers.
The narratives driving such disparate returns are intuitive: a structural and cyclical growth renaissance in India, and unaddressed structural economic challenges in China. But these narratives have overwhelmed realities, in our view. Here are some of the numbers that help complete the picture for India:
China is the mirror image of India. There is clearly not a lot to get excited about in the Chinese economy. China remains in a classic Keynesian “liquidity trap” in which an asset bubble (real estate) implodes and there is a rush across the economy to de-lever and rebuild balance sheets. Savings across the economy have increased, exacerbating China's excess capacity problem. Consumption has been weak and, therefore, excess capacity has been “dumped” around the world. Chinese policymakers have failed to properly diagnose the problem of insufficient domestic demand — and have seemingly been unwilling to address China's underlying structural problem, which is the need to shift its economic growth model away from excessive reliance on investment.
But here is what we would add to the narrative about China:
EM equities have been “all about India” over the past few years — a refuge for EM and global investors against a backdrop of considerable uncertainty (the path of US interest rates, China’s economy in a funk). India has become an expensive market driven by narrative, rather than numbers. While we also dream big, our investment process demands rigorous attention to valuation.
The big next story for EM equities, in our view, is the potential for broad outperformance against developed markets. And this involves the lifting of two clouds that have lingered for some time — US interest rates and China. We are cautiously hopeful that improvements on both are imminent.
Now is the time to get excited again about EM equities, in our view. And now is the time to calibrate narratives around India, which has benefited from clouds elsewhere.
MSCI Emerging Markets Index as of 06/30/2024
MSCI, Bloomberg as of 06/30/2024.
MSCI, Bloomberg as of 06/30/2024.
Estimates based on International Monetary Fund’s world economic outlook and indicators.
Holdings breakdown: Tencent represents 6.28%, H World represents 4.19%, PinDuoDuo represents 1.62% and AIA Group is 0.05% of the Invesco Developing Markets Fund.
Emerging market tech firms play a key role in the AI story
As the artificial intelligence story evolves, emerging market tech companies seek to expand their competitive edge in enabling generative AI solutions.
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A lower recession risk should benefit value investing in the near term, while moderate interest rates and inflation would be a longer-term tailwind, in our view.
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Photographer Credit : Gavin Hellier/ STOCKSY
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