Technology stocks lead the emerging market rally

Emerging market equities have had a good year so far, returning 29%* in US dollar terms and outperforming their developed market counterparts by almost 15%*. This will be welcome news to FundCalibre visitors. In our monthly poll last December, more than 50% of respondents selected emerging markets as their preferred investment choice for 2017.

Having been a very much unloved asset class for a few years, investors have started to return to the region, encouraged by relatively attractive valuations, improving corporate profitability and a better macroeconomic environment. The recent rally, however, has left people asking if the good run can continue or if investors have missed the boat.

However, if you dig a little deeper into the headline numbers, there are indications that emerging markets still have more to give. According to Matthew Vaight, manager of Elite Rated M&G Global Emerging Markets fund, technology stocks have really driven the recent rally, with the sector accounting for almost 40%* of the index gains this year. Of the top 10 performing stocks in the index, seven are information technology companies and another is related to the sector. This suggests that other sectors still have further to go.

Unwinding QE should be a positive for emerging markets

The US central bank having announced last week that it would start unwinding its asset purchase programme (otherwise known as quantitative easing, or QE), should also be good news for the asset class.

Investors around the world have favoured stock markets where central banks have been offering this support. Now they may start to take profits and move money from QE markets into non-QE markets, which are far less crowded and offer better value. As capital returns to emerging markets, and sentiment improves, demand should increase and economies strengthen further.

Indian reforms continue apace

One of our favourite emerging markets is India. While the stock market is approaching all-time highs and valuations are not as cheap as some other markets, they are still some way short of previous peaks and the earnings recovery cycle – slowed by heavy monsoon seasons and the demonetisation in 2016 – which suggests it could still be a good entry point.

India’s trade agreements also seem to be going better than those currently being negotiated in the UK. On 14 September 2017, Indian Prime Minister Narendra Modi and Japanese Prime Minister Shinzo Abe met for the annual India-Japan summit.

India is looking for affordable solutions and processes to further ease the delivery of government services to its citizens. Japan needs opportunities where it can deploy its hard-earned knowledge and technology.

They have agreed a number of mutually beneficial projects, including the construction of India’s first high-speed rail corridor between Mumbai and Ahmedabad. It will cut the 310-mile journey from eight hours to two and should be operational by 2022-23.

GSAM India Equity Portfolio managers mentioned to us recently that a logistics company they met had seen a one-third reduction in the time taken to transport goods between Mumbai and Delhi, due to the abandoning of checkpoints at state borders. More efficiencies like these could aide productivity exponentially.

Other important pacts signed included the development of Japanese industrial townships in four locations around India, co-operation in the automobile sector for the production of Lithium-ion batteries to power next generation hybrid and electric vehicles, research, science and technology co-operation and Japanese language education.

India is embracing reform measures and casting off the shackles of its bureaucratic past. Prime Minister Modi’s reform initiatives are changing the game for those investing in India.

Source: M&G Investments