China's economic boost could stimulate Latin American commodity returns
Recent signs that foreign funds are beginning to return to Asian emerging market (EM) stocks isn’t necessarily a sign of optimism, but could be more the result of their high exposure to global growth, said one portfolio manager.
“South Korea and Taiwan are particularly quite globally exposed in terms of their tech exports to the rest of the word,” David Kletz, vice-president and portfolio manager at the Toronto-based Forstrong Global Asset Management Inc., told Wealth Professional.
“For Taiwan, it’s primarily semiconductors. For Korea, it’s more diversified: semiconductors, memory chips, automobiles, and electronics. So, it’s interesting that we’re starting to see flows back there.”
Emerging markets had basically performed in line with global stocks and the developed markets, which have seen the worst performance since the 1970s this year, said Kletz.
“You could still have some optimism returning to the stock market if conditions are somewhat better than what’s being priced in. But, we think we’re near capitulations amongst investors.
“Things are just so extremely pessimistic right now that it would not take very much at all, in terms of upside surprises, to see a real rewriting in some of these asset classes. EM is a good barometer. So, if you do see flows start to come back there, that could be quite a positive signal for EM as well as for the broader market.”
While Kletz isn’t recommending that advisors start plunging their clients’ portfolios into EM, he did note there are some very interesting opportunities right now.
He noted that China is starting to show some optimism.
“As much as we don’t have any clear indication from Chinese policymakers about how they’re going to handle future COVID outbreaks, it does seem like things are moving in the right direction,” said Kletz. “There’s been much more explicit support for the economy coming out of those lockdowns – not just from a monetary and fiscal perspective, but also regulatory related. There’s been a regulatory commitment to provide aid to the property sector, which was struggling, and also the internet companies, which have faced a whirlwind of changing regulations. So, the tone has been much more conciliatory toward those bell-weather companies.”
Kletz said even though there’s been a lot of damage to investor confidence in Chinese financial assets, and full recovery could take time, investor confidence in its market has increased.
Given that everything is pivoting at once, he added, “it’s actually quite a fertile environment for Chinese stocks, where you have policy support, regulatory easing, and lockdowns ended – or at least ending in their severity. So, I think China would be our favourite play in all of EM right now.”
Latin America is Kletz’s second choice right now, even though “some of the performance advantage that they had enjoyed year-to-date has been pretty heavily eroded by the downturn in commodity prices.” He noted that we’ve entered a more positive commodity cycle, particularly for industrial metals, which Latin America heavily exports. Valuations have been extremely low relative to historical norms, which has also pushed up dividend yields, but staying aligned with Latin America also aligns them with the industrial metal overweight.
“We view it as a medium-to-long term story. It’s pretty attractive on a risk-adjusted basis, just because your starting point on valuations is already quite low. So, that does help de-risk some of the downside potential on this story, as well.”
Kletz also noted that China and Latin America are connected, too, “because as China does boost its economic activity, especially coming out of lockdown, that should also provide a demand source for some of what these Latin American economies produce, which is commodities.”
Kletz is recommending that advisors wanting to reposition portfolios could follow Forstrong’s lead, which is to “start to take advantage of some of these opportunities and progressively move further into them over time.
“I think that is one of the bright spots, not only just from a return standpoint, but also when most of the developed markets worldwide are tightening policy. Being in a major economy, like China, that’s doing the opposite should help to provide some diversification, as well.”
