Economic recovery to trigger growth opportunities in emerging markets
Jorry Rask Nøddekær
Lead Fund Manager, Emerging Markets & Asia Team
Every active investor knows that forecasting over the short term comes with a high degree of uncertainty. Not many forecast the world would be hit by COVID-19 this year, but despite not getting the top-down macro call right, 2020 still turned out to be a strong year for us.
We are long-term investors with a portfolio of high-quality companies that were positively exposed to many structural trends, with strong underlying business models, a financial ‘war chest’, and are fully aware of their key stakeholder environment given their strong ESG profiles. These qualities better allow them to navigate such periods of uncertainty and disruption.
We will not get all our macro calls for 2021 right, but we have a high degree of comfort that we will continue to have a portfolio of strong companies, that are well positioned to benefit from the growth opportunities that will occur, that are attractively priced over the coming 12-24 months.
We forecast three themes will take centre stage for 2021:
A global, cyclical recovery: We are close to a Goldilocks scenario for many emerging market economies as almost every emerging market country has been running below their potential growth rate. Now, with the combination of strong stimuli from fiscal and monetary policies and a coronavirus vaccine in sight, we expect a real economic recovery to play out during 2021. Therefore, we hope to see a period of above trend growth in these economies with no real inflationary pressures as there is pent-up demand and plenty of supply. To us, India, Vietnam and Brazil are particularly well positioned, into which we have exposure to property companies, shopping malls and financial service companies.
We also see a strong argument for a weak dollar. For us, the key here is not only the fiscal and monetary policy, but also the weak savings rate in the US. This should work as a tailwind for emerging markets.
As 2021 progresses we also believe there will be questions on global debt levels as well as central bank balance sheet expansion. We think that emerging markets, particularly in Asia, may almost gain ‘safe haven’ status and attract global capital flows, supported by cheap stocks, assets, currencies and fixed income assets that are still yielding a positive return.
A technology upgrade super-cycle: We believe we are just beginning a massive new technology upgrade cycle, initially kicked off by 5G adoption and extremely well supported by lifestyle changes thanks to COVID-19 that will remain and perhaps accelerate. We still find many attractive opportunities in hardware, with attractive valuations in semiconductors, special 5G components, IC-design and so on. For this new technology upgrade cycle we feel we can benefit as emerging market investors as we have access to high quality, globally competitive technology companies in markets such as South Korea and Taiwan as well as in China.
The continued digitalisation of services: Whether or not there is a cyclical recovery, there will continue to be a strong underlying digitalisation trend running through the emerging market economies. During 2020, we have seen strong improvements in business fundamentals for many key digital solution providers and the equity market has generally rewarded them well. We continue to see strong fundamentals as well as consumers expanding their reach and moving beyond online games and shopping into the digitalisation of key aspects of the service economy, and even venturing into digitised healthcare which is an area we find particularly exciting. Furthermore, the online living/digitalisation mega trends are quickly moving beyond China which for the past couple of years has been the go-to internet investment destination within emerging markets. We are now seeing this digital revolution in India, Brazil and Russia, significantly expanding the investment opportunities.
We have a positive market outlook for 2021 and believe we have a portfolio that offers attractive long-term, sustainable return opportunities.
Jorry joined Polar Capital in June 2018 to set up the Polar Capital emerging markets growth franchise in July 2018.
Prior to joining Polar Capital, Jorry worked at various firms including Nordea Investment Management, Danske Capital, F&C Investment Management, New Star Asset Management and BankInvest Asset Management.