5 Myths to Ignore About Emerging-Markets Equities

February 26, 2016

Sammy Suzuki

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Investors are fleeing emerging markets equities en masse. We at AllianceBernstein think they need a new playbook. Great investments can still be found across the developing world — just not in the usual places.

Macro conditions are a lot harsher than they have been over the past decade, when China’s manufacturing juggernaut was in ascendance and spreading prosperity to other developing countries. Investors can no longer treat emerging markets as a homogeneous bunch — and should be prepared for rougher economic cross-currents ahead.

But in our view, investors shouldn’t reject these stocks outright. Emerging markets are still home to many of the world’s fastest-growing economies and most dynamic companies. New and exciting opportunities are surfacing every day. As we see it, winning in the future will depend on identifying pockets of strength — even in weak economies — and catching nascent trends before they become obvious to others.

Our first order of business, then, is to vanquish some of the long-held misconceptions obscuring today’s emerging-markets investment picture. Here are five standouts:

You have to predict Chinese policy to win. Wrong. The measures that pertained to a bygone China — flatlining power, cement and steel production — are signs of an economy losing steam (see chart 1). But even under conservative forecasts, China’s growth is still expected to create an economy the size of South Korea, Canada or Spain every two to three years. It defies logic to say that China isn’t incubating vast opportunities.

Many of these opportunities include burgeoning industries catering to China’s rising consumer class (see chart 2). Mobile phone subscriptions, Internet shopping and online gaming are growing robustly. Sales of chewing gum and candy are brisk, as is spending on movies, foreign travel, sportswear and cosmetics. Starbucks coffee shops are popping up in every major city. We think these businesses have only scratched the surface of their growth potential.

It’s all about the commodities supercycle. Not quite. Such cycles are born every 20 to 40 years. The most recent one peaked in 2010. Resource-dependent economies and industries will remain hard-pressed as pricing normalizes. But those that consume resources — India, for one — are already reaping rewards.

More to the point, emerging-markets investors need to keep their vistas wide. The industrial-manufacturing suppliers in Mexico, Vietnam, Poland, Hungary and the Czech Republic should continue to gain from China’s waning status as a source for low-cost labor and from reviving demand from developed-markets customers. We’re also keeping an eye on developments in Argentina. Actions by the country’s newly elected, reform-minded government to undo the damage of the former regime’s policies have already reduced sovereign bond spreads and improved the competitiveness of its export industries.

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