For much of the past decade, emerging market performance has been dominated by China. It has become a large part of the index, an engine of emerging market growth but, more recently, a source of significant instability. Jorry Nøddekær, manager of the Polar Capital Emerging Markets Stars fund, believes its dominance may ebb, with an increasingly ‘multi-polar’ world emerging. This will benefit a host of new emerging market economies.
The narrative around deglobalisation is well established. For risk management reasons, companies can no longer afford to rely on single sources of supply, particularly where there are significant geopolitical threats, as is the case with China. This has been seen as bad for emerging markets, but in reality, says Nøddekær, whatever capital is leaving China will be redirected to other emerging markets.
“We think this is a real positive. It spreads the growth around and creates opportunity,” he says.
However, it requires investors to reframe their view on emerging markets and redirect investment away from the dominant Chinese internet names.
See also: Chinese property sector woes continue to weigh on fund performance in January
Nøddekær explains: “Last year was key. The level of foreign direct investment going into countries such as Indonesia, Vietnam, India and Mexico showed it was not just a short-lived phenomenon. This is global money invested with a long-term mindset.”
‘De-dollarisation’ is another factor. More trade is now settled in local currencies rather than the once-dominant dollar.
Nøddekær says: “This was a major issue for emerging markets. While there was plenty of demand, the supply side could not keep pace. Partly that is due to factors such as education, but at a higher level it was also about energy. Emerging markets needed to buy energy in dollars. They also needed a lot of capital equipment, which is also priced in dollars.”
This was a particular problem for countries such as India with relatively few sources of dollar revenue. However, the sanctions on Russia and expansionary fiscal policy pursued by the US have changed the game.
“Big surplus countries such as Saudi Arabia or China have started not to put money back into the US treasury market, and to invest more in their domestic economies or elsewhere. Many countries have started to accept non-dollar settlement. For countries such as India, it means their spending power has gone up considerably.”
To read more, visit the January edition of Portfolio Adviser Magazine
