EM Holds Steady Amid Volatility

Emerging Markets Equities Update and Outlook, Q3 2024

Hi everyone, my name is Ola El-Shawarby and I'm the portfolio manager for the emerging markets equity strategy at VanEck.

We're seeing volatility, spiking as a result of higher concerns about the weaker economic numbers coming out of the US and the recent moves by the Bank of Japan, which has triggered a carry trade unwind and pushed global markets into panic.

EM holds steady during August market meltdown

One thing to note, EM did actually okay on a day like August 5th where we saw meltdown in markets, particularly in the US. EM largely speaking did relatively okay with the exception of Taiwan and Korea, which are much more leveraged bets on US tech and AI developments, which is why they've done so well earlier in the year. But also in those two markets, positioning has been heavier than usual. And so, with the extreme volatility, they got hit hard.

We actually still like the fundamentals of the semiconductor space. We think the long term drivers of growth as it relates to AI and heavy CapEx spending by hyperscalers in the US continues to be there. Obviously with strong movements in the market, valuations are also shifting. So we are reviewing our preferences and might make some changes within the mix of our semiconductor exposure.

We believe Fed rate cuts would create a supportive environment for EM

And then specifically on the outlook for emerging markets, I think with what's going on short term we expect the volatility to continue and we will continue to monitor the data coming out of the US and out of emerging markets.

But on a positive note, emerging market central banks have actually been very disciplined in this cycle. They have hiked when they needed to, they've paused when they needed to and they continue to be very disciplined in their approach towards managing inflation and managing the interest rate cycle. If as a result of this weaker environment in the US, as expected we see the Fed cutting more aggressively and over time the dollar weakening, we should actually eventually see this being a supportive environment for emerging markets, particularly in light of the very low positioning and underinvestment in the asset class.

As far as China goes, we're seeing the government more specifically introducing initiatives to stimulate consumption. We've seen multiple measures that they've recently talked about, whether trade-in programs for industrial equipment and consumer goods, introducing some subsidies in spaces like the automotives and other different sectors of the economy, all geared towards supporting the weaker consumption. It's not going to be very easy because there is a confidence problem there and that is largely related to the property issue. So we probably need to see the government addressing more decisively the property problem. And we are definitely seeing more voices internally and externally calling for that. If they do shift course, that will be very helpful. But in the meantime, we are still focused on specific pockets of growth within the country and trying to tighten conviction on the names that we own and really center around names where we have conviction that over time they are long-term winners whenever the environment normalizes.

The team also visited Vietnam, Indonesia and Philippines. We are getting excited about some opportunities in those countries and we think that in general, different parts of ASEAN are beneficiaries of the China plus one strategy.

And there are going to be pockets of growth there as well that are exciting for us. In general, in this environment where volatility is very high and the narrative is shifting in a fluid manner, we are focused on our bottom -up investment process and being very disciplined.

And we are really trying to tighten conviction on names that we have within the portfolio and making necessary adjustments whenever we see opportunities as well when markets go through these kinds of dislocations. So overall, we are cautiously positive about the long-term story in emerging markets. But as mentioned, the situation is fluid and we are being very disciplined in monitoring and reviewing our holdings on a regular basis and continuing to make adjustments to the best interest of the strategy.

Thank you very much and looking forward to talking to you again soon.