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By Patricia Ribeiro - July 10, 2019
In my last update in April, I had my fingers crossed that we would soon see a truce in the U.S.-China trade war. But in May, another round of tariffs on goods from China and new threats against Mexico, followed by promises of retaliation, roiled global equity markets. We ended June back where we started—with cautious optimism that a truce was in the offing. However, a key takeaway from this experience should be that predicting the exact timing of a trade agreement can be a losing proposition.
Our policy has always been to manage the portfolio on a company-by-company basis and let macro events play out. Furthermore, we find that companies operating in emerging markets are accustomed to volatility, and we look for sharp management teams adept at making adjustments. In fact, earnings reports show that there are companies growing even amid the headlines, which the markets are beginning to recognize.
Although it remains unclear how these disputes will be resolved, trade is just one of many factors impacting emerging economies. For more insight on sorting out the winners and losers, click on my video below.
In 2019, we are seeing investors focusing more on the bottom up—looking more for stocks that will outperform—and less on just headline news.
So, what has been positive so far for the first half of 2019 is that after first quarter earnings, so as we saw a lot of volatility in the first quarter. But as companies started reporting after the first quarter, we saw that markets started to really distinguish between companies that continue to do well, continue to show growth, earnings acceleration, and the ones that do not.
On the downside, I think it's the continuation of a lot of the rhetoric around trade wars. Obviously, the issues between the U.S. and China are still lingering; nothing has been decided. If anything, I would say it has actually worsened some, in terms of now China being more proactive in responding to some of what they feel are accusations from the U.S., and some of the measures that we've been seeing against some of the corporates on the Chinese side. And that has also extrapolated to other countries as well. We're starting to see a little bit more rhetoric around other countries in emerging markets.
The thing with emerging markets is all these economies, and all these companies in the emerging market space and universe—they are actually very used to volatility, they are used to the economic environment changing pretty fast. So, management tends to very good and sharp in terms of shifting and trying to adjust.
For example, we're seeing some manufacturing that's moving out of China, or already thinking about moving out of China to other emerging countries, other countries in Asia. Smaller countries, but with fewer issues with trade with the U.S. So that's a positive; it's actually bringing investment to a lot of those smaller countries. In other parts of the world, we're also seeing commodities being purchased more out of emerging countries versus the U.S., because of again, that shift that's happening already. So that's positive for trade balances in other countries.
We continue to find plenty of names to own in emerging markets. Emerging markets continue to grow, even with all the headline news and issues with trade war, and everything else globally. Obviously, there is an opportunity there—dynamic companies that are continuing to really invest and look for that earnings acceleration that we look for.
For the rest of 2019, I wouldn't be surprised if we continue to see the same level of volatility, the same level of headline news and rhetoric around trade wars; political issues; geopolitical issues, as well, going on around the world. But it seems, again, that the markets are now realizing that there are differences, and there are winners and losers in this environment, and the market is starting to really focus more on what the winners are, as opposed to just focusing on the headline news.
Get additional emerging markets insights and more in our latest Investment Outlook.
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January 8, 2019
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