On the latest Emerging Market Equity Quarterly Perspectives podcast – the show that looks at what happened in the recent quarter while providing our outlook for the asset class going forward – host Tom Harvey is joined by Global Head of Equities and Head of Emerging Markets Devan Kaloo to:

  • Recap the last quarter and the end of 2023
  • Look at emerging markets' performance and how they compared to developed markets
  • Provide a glimpse at what investors may expect for the asset class in the new year
  • Answer what potential prospects we may see in 2024, and if quality stocks have the potential to outperform


Tom Harvey: Hello, everybody, and Happy New Year. I'm Tom Harvey from abrdn, and you're listening to the emerging market equity quarterly podcast, the show that looks at what happened in the recent quarter, and provides our outlook for the asset class today, joined by my colleague, Devan Kaloo, Global Head of Equities and Head of Emerging Markets. Devan, welcome to the podcast. It's great to have you on.

Devan Kaloo: Thank you.

Tom Harvey: We'll start today's podcast with a review of the fourth quarter of 2023. What did we see out of emerging markets? How did they perform? And maybe in particular, how do they perform compared to develop markets?

Devan Kaloo: Sure. So we saw a very strong end to the year with equity markets more broadly, with emerging markets up 4%. Although that did underperform developed markets by about 5%. But much like all of 2023, we saw very similar themes in so much as if you look at what emerging markets X China did, it was up 6% in the quarter, whereas China was down 2%. And I suppose that's really been the story of emerging markets, that you've been waiting for China to do something. So far, it's disappointed. But if I think about it, we saw the creation of what I would say as very benign environment that we had there, pound defend pivot, the signalling of peaking of interest rates, which certainly helped equities as an asset class, but the emerging markets and more broadly developed markets as well. And on the back of that, as I said, we saw that stock performance.

Tom Harvey: And so from a relative standpoint, for abrdn, what did the fourth quarter mean?

Devan Kaloo: Well, from a relative perspective, we were flat versus the index. I suppose the key issue here really is been that just about everything else in the portfolio did well, but China drag down performance, and in particular, China holdings, and if I take a step back, and maybe talk about it in the context of the full year, for 2023, maybe that be more useful, because what we saw in emerging markets in 2023, was the markets were up around 11%. So the underperforming developed markets up 24%. But again, within that you saw China down 11 over this period, and emerging markets ex-China up around 21%. And within that we saw Taiwan up 32, Mexico, something like 40 odd percent Poland AppFolio percent. So there was this real bifurcation in emerging markets. And I suppose when you think about it, that's really been a key issue for us within the portfolio, because over the year, our portfolio liked the index by about 170 basis points. And that is because our China Hong Kong holdings took away or detracted about 393 basis points, which means that the rest of our portfolio did outperform by about 223, but not enough to offset that China thing. And I think if I think about what that issue or the issues that we were talking about for 2023, we effectively identified three things. The first was that we felt that the US slowdown would be on the cards and would that US rates peaking and with that, that would be supportive for emerging markets, the second was definitely expected to see a China recovery coming through certainly help in that market higher. And the third is what we've been calling the capex story, which is effectively three things, the benefits of nearshoring, the tech recovery, and the green transition, which was really a strong support for emerging markets in China. And that, interestingly enough, has been something that has really paid out really well in emerging markets. So if I think about those three calls, we got at least two of those, right? Certainly, if you think about US dollar and US rates, they certainly peak towards the latter end of the year. But within that, we saw some real strong counter performances by some of the most sensitive economies to the US dollar. So Latin America in particular. And some parts of emerging markets did really well on the back of that. But the real fundamentally interesting story was the Catholic story. So we saw places like Mexico did really well on the back of the nearshoring story. For instance, you saw other countries like India or Indonesia, similarly benefiting. The transition story of the green transition story helped in other countries and companies in places like Peru and other places. And of course, the big tech story of which AI led the markets higher, certainly supported places like Taiwan. So that was good to see. What we didn't see come through was the China recovery. And I think here is maybe something I would like to talk a bit more about because it's left us scratching our heads. because if you look at the operational performance of our Chinese companies, they did very well. So if I think about earnings, and 2023, on average, the earnings growth for our companies in China, Hong Kong was around 39%. The earnings growth for China more broadly was 11%. Yet our stocks significantly underperformed the market, with our stocks, on average, down around 22% versus the market down 11%. And really, that reflects the fact that we've seen a major derating on what I would consider as higher quality businesses in China, because you've seen foreigners selling in contrast areas that did very well, were places like financials, technology, petrochemicals, where earnings were actually pretty poor, but held up very well, because these are the stocks have been supported by the Chinese institutions. So I would argue that one of the key features of 2023 Was that actually, at the stock level, you start, you saw earnings recovery coming through for many companies in China. But you didn't see that coming through in price performance. And that reflects the significant outflows that we've seen out of China as people have been concerned about the Chinese story.

Tom Harvey: Great, thank you for that recap of 2023. So as we've now moved into 2024, you know, some of these themes might be a bit longer term that you were discussing, what are we expecting from the asset class in this year?

Devan Kaloo: Well, if I think about what's happened towards the end of last quarter, I suspect that we have a pretty benign environment. Increasingly, the consensus seems to be that the US interest rates will be coming down in 2024. And that is obviously very positive for emerging markets, for two reasons, one, because of the currency impact, but second, it allows em countries to cut interest rates, and with that, hopefully stimulate economic growth. And that certainly will be one of the key drivers, we think in 2024. The second thing is that that capex story of nearshoring, green transition, and indeed technology we don't think has finished, it has plenty of roadway yet, we continue to see FDI flows into places like Mexico, Indonesia, and others continue to rise. And that's good for those economies. In addition to that, the recent cop talked about the move away from oil and coal. And as a consequence of that, we think the green transition story will remain very much central place. And of course, the big tech story where you see two things. One is the AI led recovery, but also more broadly in that you see a semiconductor recovery after several years of Danta. The one which we are still hopeful for, but perhaps is more controversial is the China recovery. And I think here, what we really mean is how does China restore investor confidence? And that's probably one of the big questions and challenges for 2024. But if you think about the other two areas I talked about, certainly for EM ex-China perspective, the lower US interest rates, lower EM interest rates. And improved CapEx story is still very strong story and supportive for the asset class.

Tom Harvey: Great. So you mentioned quality with regards to China, in particular, the fact that perhaps quality Chinese businesses suffered maybe a bit more than some of their lower quality peers. What are the prospects in 2020? For not just for China, but more broadly for emerging markets, that quality stocks have the potential to perhaps outperform?

Devan Kaloo: So I think we're beginning to see that right. So outside of China, you've already started to see quality and growth doing better. And again, against that backdrop of lower rates, and indeed, slower global growth. You're seeing this rotation out of value into quality and the like. So I think that will become a tailwind for us, given our quality biassed approach, certainly into 2024. The big question, I think, really is whether that holds true in China, because as I mentioned earlier on, the things that have been doing well, which are the banks, the petrochemicals techniques, these many of them fit into that value camp. And they've been held up by lack of domestic selling, rather than any major fundamental viewpoints. And then I give you a case in point just to illustrate this issue. When I think about the financial sector overall in China, earnings were up around 4% 2023 Whereas in contrast, the markets or the financial sector was only down around 5%, which meant it significantly outperformed the index, and indeed significantly outperformed our quality holdings. And if you think about financials, and particularly banks in China, they are seeing huge squeeze on the net interest margins and of course, growth challenges ahead, funding them, but as I've mentioned, the stocks have done quite well. So that's really the one that I think we need to make sure we monitor very carefully. And where I think eventually, you'll start to see investors coming back and investing in some of these higher quality businesses in China because it's delivering the results.

Tom Harvey: Excellent. Devan, thank you very much. That feels like a good place to bring this podcast to a close. Devon, I just want to thank you for joining us today. Thank you. And thanks, everyone who took the time today to listen in. If you enjoyed today, then please download our other podcasts from our website, or wherever you normally get your podcasts Thank you.

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