Suchit Punnose on why you should invest in emerging markets this year

Suchit Punnose, Founder and CEO of Red Ribbon Asset Management discusses investing in emerging markets. 

After a tumultuous 2020, this year began with an increase in investor interest in emerging markets.

During the first three weeks of 2021, according to data released by the Institute of International Finance, US$17 billion was invested into major emerging market stock and bond assets.

This follows on from an inflow of US$180 billion in Q4 2020, suggesting that emerging markets are perceived as offering recovery potential in spite of the pandemic.

Investing in emerging markets obviously does carry  higher risks
The initial emergence of the COVID-19 pandemic in Asia inevitably led investors to reduce their exposure to  those regions as they anticipated significant losses Strict lockdowns implemented to slow the spread of the virus also led to investors cutting their holdings further.

However, a few months into the pandemic and there was a definite shift. With countries like the US, the UK, much of Europe and other developed markets dealing with consecutive lockdowns and rising deaths, Asian countries began to see cases fall.

Investors again switched attention to the potential in emerging markets, which have also outperformed the developed world. For example, the MSCI EM (emerging markets) Index rose 9% in January 2021, compared with 2.7% for the broader MSCI World Index.

As the year wore on the pandemic again revealed its capacity to surprise: India suffered and continues to suffer a severe second wave. According to the Economist, at least 350,000 people are now testing positive for COVID-19 every day. The official death toll stands at more than 200,000 with daily rises of ca. 3,000. There is widespread suspicion though that the reality is being massively underreported d and could be between ten and 30 times higher.

So far, however, experts expect that this fresh wave shouldn’t damage India’s economy too badly. Indeed, the Asian Development Bank is forecasting India’s GDP will rebound strongly by 11.0% in 2021-22 due to continued economic recovery boosted by increased public investment, the vaccine rollout and a surge in domestic demand. The forecast assumes that vaccines are deployed extensively across the country and the second wave of the coronavirus disease pandemic is contained.

However, the resurgence of the virus in India – and unexpected community outbreaks in hitherto barely affected Taiwan – shows just how difficult it is to predict with any accuracy how the path of the pandemic may yet impact other countries.

India offers huge potential for investors willing to take a risk
Let’s assume that India continues to gather strength as an emerging market and investors continue to be interested, should you join in? As with all investment decisions, much depends on your portfolio. Keeping it balanced should remain a priority and therefore it’s likely that major global companies and developed markets should account for most of your holdings.

However, investment is always about a level of risk and I think we will see interest increase throughout this year. For now, it appears that opportunities for economic growth – above and beyond just recovery – are entrenched in the emerging markets and the developing world. For example, China remains the largest emerging market and is continuing to drive growth throughout the wider region.

China’s economy is currently growing faster than the UK, Europe and the US. Last year, China managed to post a 2.3% growth despite the pandemic. Compared with developed countries that all contracted, there is much to be optimistic about in China for investors. If we cast our minds back right to the start of the pandemic when China was obviously at its epicentre, it certainly didn’t seem likely that it would end the year economically stronger than when it started.

China and India continue to drive global investment opportunities
The investor outlook for emerging markets does depend, at least in part, on how the pandemic continues to develop. It also depends on the vaccination programmes and how fast countries in the developing world can access and roll out the jabs.

India’s current situation is likely to slow down the global availability of the AstraZeneca vaccine, as the country is the biggest producer in the world. This will have a knock-on effect on developed world countries who are trying to get to the end of their vaccination programmes in a bid to reopen their economies.

Emerging markets have always offered investors more volatility than developed countries. This should always be at the forefront of your mind as you weigh your investment strategy. A lot of the current interest in emerging markets is directly due to the high liquidity because of spending by first world central banks (known technically as Quantitative Easing or “QE”) as well as continuing record low interest rates. You should also be aware that this does mean, though, that as monetary policy tightens again, this will make emerging markets more volatile.

However, countries like India and China can still very much drive global investment opportunities and have the scope to implement more fiscal measures to increase their appeal. And for investors willing to take the risk of the market’s volatility, it could be worth taking a closer look at emerging market debt. This is particularly attractive as the wider investment environment with low yields.

India remains a strong investment market
India, despite its current problems with the pandemic, remains a region with, we believe, one of the greatest investment potentials. Despite its “emerging market” status, in fact it has one of the longest-established stock markets globally, with around 6,000 listed businesses. In short this offers investors a far wider choice of investment opportunities than in any other emerging market.

Furthermore, just 10% of listed Indian companies are worth more than US$200 million. In China, by contrast, businesses over that size make up about 80% of the market. This means that most companies are relatively small with massive opportunities for growth; as such it is still a largely untapped market for global investors. Its huge population of around 1.4 billion is constantly increasing the consumption of goods and services, while boosting the demand for housing and commercial property. As China’s population is appearing to stall for the first time in 60 years, India looks set to continue to offer exceptional population-driven investment returns

Finally, in India, because there are so many companies still owned by families there are different kinds of investor relationships on offer. Strategic conversations with managers and owners can more easily encompass engagement on issues from ESG, to remuneration, board composition and broader corporate governance issues. The potential on offer to build wider-ranging alignment with Indian companies should allow international investors to be more confident in India as a reliable market environment.