This was written by Bloomberg Intelligence equity strategists Gaurav Patankar and Gina Martin Adams. It first appeared on the Bloomberg Terminal.
Our five highest-conviction emerging-market equity themes remain digital consumption, dominant exporters, wellness, fintech in addition to an infrastructure and industrial renaissance.
1. Top emerging-market proxies for digitization
Given the population pyramid (age and gender distribution), mobile and broadband penetration, underdeveloped infrastructure in some emerging markets and organic development of the tech ecosystem, digital consumption may dictate which nations’ consumer sector outperforms. Companies such as Alibaba, Tencent, JD, Pinduoduo and Baidu are fueling consumption and China’s emerging-market leadership. Yandex is prominent in Russia, and MercadoLibre in Latin America.
Reliance paved the path for home-grown conglomerates to build digital platforms. We identify many such digital leaders across emerging markets, besides infrastructure and logistics companies supporting such digital consumptions, as key beneficiaries of this theme. The equity basket in the exhibit is a practical tool to track the efficacy of this theme.
2. Dominant exporters within emerging-market equities
We expect each emerging-market country to help their leading exporters with tax and labor incentives, as this could fortify their margins and dominance as export engines. After the pandemic, the shortening and re-tooling of global supply chains will make exporters a priority for governments, especially those that are critically embedded, as they can benefit from the diversion of flows from China and have high job-creation potential. South Korea and Taiwan will support high-tech manufacturing, while India will focus on IT services, pharmaceuticals and engineered goods. Turkey may seek to shield industrial exporters. The same goes for the materials complex in Brazil and South Africa, and textiles in Indonesia.
In this basket, we identify dominant exporters with potential for margin expansion.
3. Investing in consumer wellness via staples, health care
In a post-coronavirus world, we expect wellness to emerge as an important investment theme. Wealthier consumers’ focus on wellbeing, and increased demand for government stimulus from those with lower incomes, may be key drivers. Health care is a nascent sector in emerging markets, making up just 3.8% of the index vs. 15% for S&P 500. While staples’ weighting is on par with the S&P 500 at 6.9%, the sector’s larger companies with mass production and premium goods could drive this number higher as demand picks up, and reliability and brand play an important part in consumption decisions. In this basket, we offer ways to track this theme, particularly through stocks in the Staples and Health-Care sectors
4. How to partake in the fintech evolution
Within emerging markets, we expect fintech leaders to emerge from the traditional financial-intermediation ecosystem. The institutions that come out ahead in the next five years can overcome lingering nonperforming asset issues and high cost structures and integrate technology the fastest. Since more growth is rural and downmarket, nimbleness, low customer acquisition and servicing costs and content will matter most.
In this basket, we tend to track those financial platforms that are stand-alone fintech or have tech-inspired centricity ahead of the curve
5. Industrials benefiting from fiscal spending & de-conglomeration
As the dollar weakens, most emerging-market countries may further their agenda of significant fiscal outlays for infrastructure. This could benefit domestic industrial sectors, with China, India, Indonesia, Brazil and Mexico at the forefront. The focus would be on the urban poor and improvement in rural infrastructure. We expect this to benefit the industrial sector and infrastructure, given the focus is on creating jobs. Additionally, with low rates and extreme valuation dispersion between sectors, more de-conglomeration to drive value creation is likely.
In this basket, we include direct stimulus beneficiaries such as L&T in India, but also companies with embedded sum-of-the-parts stories.