"You can't just run a portfolio of Canadian stocks anymore"

CEO explains why he sees emerging market opportunities beyond China, highlights some of the world's top-performing equity markets

"You can't just run a portfolio of Canadian stocks anymore"

China has been the most important emerging market economy of the past 20 years. Its rapid growth, industrialization, and transition to key global player has already made countless investors and entrepreneurs wealthy. The country’s paramount place in emerging markets, though, has meant headlines and outlooks for emerging market investors are dominated by a focus on China.

Recently, that focus has negatively impacted the outlook for emerging markets. China’s growth forecasts have been revised down. Geopolitical tensions have risen, as has more protectionist rhetoric from Western economies, traditionally China’s biggest customers. Despite this, Tyler Mordy sees real positivity in emerging markets because he’s looking beyond China.

“Seven of the top ten performing equity markets this year are in emerging markets,” says Mordy, CEO & CIO of Forstrong Global Asset Management. “We see that as likely to continue because many of these countries have better growth, lower debt levels, lower inflation and better valuations [than developed economies].”

While China remains a key player for global investors, Mordy’s outlook is that while headlines drag performance for that country, many other key emerging markets have laid the groundwork for significant growth. India, for example, has long been held back by poor infrastructure. Now, he says, the right investments are being made to turn India into a growth story. Similar stories are playing out in other parts of East Asia—such as Vietnam—and in Latin America.

In many of these economies, Mordy sees the same confluence of cheap labour, improving infrastructure, attractive debt levels, and growing domestic consumption that made China the growth story of the past two decades.

The pandemic, in part, set the stage for these economies to perform well. Mordy explains that while many developed economies overspent and accrued huge debts to cope with COVID-19 and are subsequently dealing with massive inflation, developing economies avoided those “self-inflicted wounds.” Instead, many emerging markets have lower inflation rates and debt rates than their western counterparts.

At the same time, their attractive qualities for manufacturers—such as competitive wages—set the stage for growth potential. After a decade of investor focus on digital and ‘post-industrial’ sectors like US tech, there is a push to reindustrialize to both power growth and drive major global transitions in areas like green energy.

Mordy is cognizant of the risks present in emerging markets for investors. Geopolitics is a concern for some countries. In others internal politics and the election of more left-leaning governments can make the investor landscape appear less friendly—though Mordy notes that we’ve seen that in Latin America, and the left-wing parties have largely moved to centre once in power.

The biggest risks he sees in the emerging market space are actually external to these economies. Emerging markets tend to do better when global growth is high. That means downturns in developed markets have a disproportionately larger impact on emerging markets given their high operating leverage and, in many countries, high commodity export orientation. Therefore emerging markets are subject to many of the same risks as developed economies, namely that central banks hike too aggressively and create a recession.

On the home front, one geopolitical risk has been some of the ratcheting rhetoric between India and Canada over the alleged assassination of a Sikh leader in Canada by a supposed Indian agent. For the moment Mordy sees the subsequent ratcheting of tensions between India and Canada as largely sabre rattling, though he does admit it might be something of a “tail risk” for investors and may damage investor sentiment.

Despite some risks, Mordy’s bullish view of emerging markets is informed by his reading of economic history. The high-growth periodin the 2000s was a boon for emerging markets. In the same way, the slow-growth decade of the 2010s led to poorer emerging market performance. Now Mordy and his investment team  the global economy entering a new economic cycle, similar to the 1950s and 1960s with persistently high government spending, rising rates, rising household incomes, rising corporate revenues and a return to manufacturing. Ultimately, Mordy says that a global race to reindustrialize — driven by decarbonization, reglobalization and remilitarization — is reversing the secular stagnation trend of the last decade and powering structurally higher growth and inflation.  He believes that this new environment will be enormously beneficial for many emerging markets.

Forstrong’s thesis is reflected in their new suite of ETFs, Mordy explained, which hold active allocations to global markets in line with where they expect global growth to come in the next decade — and where valuations are cheap. Mordy says that many of the passive emerging market funds available to Canadian advisors still focus on the ‘winners of yesteryear’ with an overallocation to digital heavyweight stocks in China. Mordy contrasts that with his ETFs which use an active macro approach to capture the pockets of opportunities within countries, sectors and themes.

As advisors consider the considerable economic and market uncertainty ahead, Mordy believes that some emerging market exposure can be useful. He notes that even as political rhetoric and geopolitical tensions have ratcheted up, the global economy grows more interconnected and interdependent by the day. That connectedness will continue to manifest for investors in both crises and opportunities.

“Investors need to build more resilience into their portfolios against the global shocks of a modern financial system,” Mordy says. “The best way to do that is to take a wide angle worldview and look at every investment decision through that frame. Be mindful of China and other emerging market trends and have some level of global diversification in your portfolio. That means allocating a strategic percentage of client portfolios to Asia, to Latin America, and even to developed markets like Japan to protect clients, to manage risk, and to capture some of the growth opportunities out there.

“You can’t just run a portfolio of Canadian stocks anymore unless you want huge volatility. A global macro strategy can effectively offset the high volatility of Canadian assets through international exposures.”