By David Semple, Portfolio Manager, VanEck Global
As the beginning of the year and the quarter unfolded, so did the global reach of COVID-19 and its impact on emerging markets’ economies. Looking at some of the countries in which we invest, China remains an important case study. Economic activity dropped dramatically but there are clear, tangible signs of recovery, although “back to work” is much more robust than “back to play.” India had some challenges to overcome, particularly in its financials sector, even before the costs of the pandemic are considered. The shutdown and the impact on the economy and credit costs will exacerbate the situation. Whilst the Emerging Markets Equity Strategy does have the financials exposure in India, it is focused on what we believe are “best of breed” companies, like HDFC Bank, that ultimately benefit from these tough times. In Brazil, political noise has become louder and the market has been volatile.
Emerging Markets Equity Outlook Beyond COVID-19
The consequences of a global pandemic juxtaposed with truly unprecedented monetary and fiscal stimuli will be with us for many years to come. Emerging markets have traditionally underperformed in a risky environment but, in general, we believe the behavior of the asset class has not been as bad as many might have predicted. A large part of the negative outcome was generated by the abnormal strength of the U.S. dollar, driven by a global “shortage” of dollars. This has started to normalize and we continue to have a reasonable hope for U.S. dollar stability in the coming quarters. Whilst it may not matter in the short term, emerging markets currencies are cheap, particularly versus the U.S. dollar.
Whilst the overall impact of the pandemic has been very negative across all equity asset classes, there is some silver lining in a very dark cloud. The Strategy has always been forward looking, focusing on sectors and industries that form the future of emerging markets rather than the past. It is clear that the golden era of globalization has gone and concentrated supply chains will be increasingly questioned. The “business model” of many emerging countries as they progress from low to middle income was predicated on cheap labor and the comparative advantage that this endowed. Either that or as a supplier of significant commodity resources. We believe both “models” will be increasingly challenged in the future and successful emerging markets economies will be based on innovation, education, domestic demand and consumption. The Strategy continues to be heavily invested in the future of emerging markets, in industries that, we believe, match the likely route that the best economies may take. Industries such as healthcare, e-commerce and education may be the most fruitful areas of investment going forward, we believe. And one consequence of the pandemic is that it accelerates trends in some of these areas and changes behaviors towards increased consumption of certain parts of these industries. We believe the Strategy is well positioned for that future. Once the short-term distress and volatility recede as global government responses flow through the financial system, we expect bottom-up stock selection to drive alpha once again in emerging markets countries around the world.
Concurrent with their forward-looking business models, exceptional structural growth companies tend to have robust balance sheets, a feature which not only helps them to weather this particular storm but also take advantage of opportunities as the clouds lift.
Investing in emerging markets is for the long haul, and whilst we can’t say when business will resume, but we can say, with conviction, that the Strategy is very well positioned when it does.
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For a complete listing of the holdings in VanEck Emerging Markets Fund (GBFAX) as of 3/31/20, please click on this PDF. Please note that these are not recommendations to buy or sell any security.
†Quarterly returns are not annualized.
*All country and company weightings are as of March 31, 2020. Any mention of an individual security is not a recommendation to buy or to sell the security. Fund securities and holdings may vary.
All indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets countries. The MSCI Emerging Markets Investable Market Index (IMI) is a free float adjusted market capitalization index that is designed to capture large-, mid-and small-cap representation across emerging markets countries.
MSCI Emerging Markets Investable Market Index (IMI) captures large, mid and small cap representation across emerging markets (EM) countries. The index covers approximately 99% of the free float-adjusted market capitalization in each country.
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This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results; current data may differ from data quoted. Current market conditions may not continue. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck. ©2020 VanEck.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to the risks associated with its investments in Chinese issuers, direct investments, emerging market securities which tends to be more volatile and less liquid than securities traded in developed countries, foreign currency transactions, foreign securities, other investment companies, Stock Connect, management, market, operational, sectors and small- and medium-capitalization companies risks. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability.
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