As part of our PM Insights series, Director of Emerging Market Equities and Portfolio Manager, Justin Leverenz, CFA, shares his latest perspectives on emerging markets.
The following are highlights from his conversation with John McDonough, Head of Distribution and Marketing:
1. Our Thoughts on China
China embodies one of the world’s most durable growth stories. Recent quarterly gross domestic product (GDP) numbers exceeded expectations but talk of the country’s excess capacity and corporate debt remain as caveats to their impressive growth. We believe that this is a result of the Chinese economy being largely misunderstood.
China has exhibited one of the more impressive levels of social mobility and rising standards of living. It is a country with a growing middle class; productivity and savings rates are high; and entrepreneurship and creativity in the country have been unleashed, rivaling such worthy competitors as Silicon Valley and the Boston corridor.
We believe China’s underlying growth conditions are compelling for the foreseeable future.
2. On Emerging Market Tech Companies
What we’re seeing in the technology sector is the emergence of oligopolies—at least in terms of ownership of data. In social media we have Facebook; in commerce and search we have Google; and Amazon participates in multiple market segments.
We believe that Alibaba has best understood and capitalized on the revolution from information technology to data technology and we are beginning to see that in terms of how they are monetizing data.
3. On the Inclusion of China A-Shares in the MSCI Emerging Markets Index
We believe emerging markets has the potential to become a China-Plus world. Currently, China represents roughly 25% – 30% of the index, but many investors are underweight relative to the index, potentially from lack of confidence about the country’s prospects.
The A-share market is continental in size, dwarfing its developing market counterparts in terms of underlying market capitalization and trading volumes. I believe MSCI’s inclusion of A-shares was inevitable—and only the first step of a multi-year journey of recognizing the extent of China’s market.
4. On the Transparency of Economic and Business Data Published by China and Other Emerging Markets
In all markets in which we invest, there are issues with data collection and representation. A good illustration of this is India. India posted high GDP growth figures last year but it is difficult to reconcile GDP figures with the underlying data in terms of retail sales or capital formation, since India has been a cyclical bear market for the last three years.
While we see some of that same circumstance in China, we believe that the underlying integrity of published statistics is fairly strong. In fact, China provides additional granular data about its economy that other countries don’t. The bottom line is that China accounts for roughly 30% of the world’s growth—and we believe it will continue to be a major growth engine for many years.
5. On Geopolitical Risks and the Search for Yield in Emerging Markets
In our estimation, political risks in emerging markets are probably higher than what bond investors are paying for. We are living in a low interest rate environment that has encouraged some investors to take on too much risk in search of yield in a yield-deprived environment.
We believe that political risks have not been embedded in the credit and FX markets and also in the prices of underlying assets.
While we are aware of the macro environment, we focus on identifying high-quality companies with durable advantages and a compelling host of options with the potential to materialize over many years.
6. On the Performance Divergence Between Small , Mid and Large Caps in Emerging Markets
Year to date, we’ve seen small- and mid-cap stocks of emerging markets outperform large-cap stocks in developing markets. This is partially due to the recovery of mid caps, which have rebounded from their difficult period last year.
Over a 12-month period, there is still a performance dispersion between small, mid and large caps indicating additional room for upside through mean-reversion —especially since we are in a “risk-on” environment.
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Oppenheimer Developing Markets Fund holdings as of 6/30/17: Alibaba Group Holding Ltd.: 6.3%; Tencent Holdings Ltd.: 5.9%; Facebook: 0%; Amazon: 0%.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
The mention of specific companies does not constitute a recommendation by any particular fund or by OppenheimerFunds, Inc.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Eurozone investments may be subject to volatility and liquidity issues. Investments in securities of growth companies may be volatile. Mid-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a mid-sized company, if any gain is realized at all. Investing significantly in a particular region, industry, sector or issuer may increase volatility and risk.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.