With several emerging market economies struggling with crucial elections, geopolitical uncertainty, and foreign exchange headwinds, Alejo Czerwonko, UBS Chief Investment Officer for Emerging Markets, appears on Market Domination Overtime to discuss the changes taking place in these markets.
Cherwonko emphasizes that emerging markets are “not the emerging markets of your grandfather’s time” and are quite mature. Thirty years ago, only 3% of emerging countries were investment grade, Cherwonko says, but now it’s over 50%. At the time, the markets also suffered from high inflation, fiscal irresponsibility, and the reliance of monetary policy on executive power. Today, Cherwonko argues, “everything has changed.”
Bonds in particular offer big opportunities, but they are not as strong as those in the U.S. Latin American bonds offer “relatively high yields” and are full of potential. Cherwonko also notes that Asia’s tech sector has a lot of “very professionally run companies with strong balance sheets.”
For more expert insights and the latest market trends, click here to watch this entire episode of Market Domination Overtime.
This article was written by Gabriel Roy
Video Transcript
The forces of inflation are not just affecting the United States, but markets around the world.
European Central Bank President Christine Lagarde said today at a panel discussion in Sintra, Portugal, that she expects inflation across the euro area to remain challenging until the end of the year.
Beyond inflation, several emerging market economies have been struggling in recent months with crucial elections, geopolitical uncertainty and currency headwinds.
Now joining us is Alejo, CCO Cio, US Emerging Markets at UB Ss.
Alejo, thank you so much for joining us. I appreciate it.
Thank you for calling.
Ah, so I thought I’d start off by saying that investors who have heard about emerging markets, actually, I’ve been selling those markets for a long time.
More than 10 years.
What about them, how would they change Alejo?
How is it different from five years ago?
I want to start by emphasizing that 10 years ago emerging markets were not the emerging markets of your grandpa’s time, they were quite mature.
Yes, asset classes have evolved.
Let’s take an example.
Thirty years ago, the investment grade for emerging markets was 3%.
Today we’re talking about those that are above 50% investment grade.
Thirty years ago, a typical emerging market suffered from very high inflation rates.
Well, fiscal irresponsibility, irresponsibility, monetary policy, reliance on executive power, all of that has changed.
Well, inflation is now under control.
We have an inflation targeting system and an independent central bank.
So, in terms of investment returns, it’s a different asset class.
They’ve done pretty well when it comes to fixed income and fixed income.
When it comes to stocks, the situation is not as good as it is in the US, and there are many reasons for this.
But I think it’s important to recognize that when you look at the health of emerging market balance sheets, today they are better than many developed markets at both the national and country level.
And in terms of the range of companies, emerging markets have very professionally managed companies with strong balance sheets.
Given the clear improvement in his situation, Alejo is probably in the best position right now in terms of growth.
But contrast this with the risks associated with high inflation, which is clearly an issue not just for developed markets but also for some emerging markets.
And then there’s the dimension of political uncertainty.
Yes, I think there is growing political uncertainty almost everywhere.
Hmm, I guess we can conclude that elections in many emerging markets today attract more attention than elections in countries like the United States.
So to specifically address your question about opportunity, I think this is a global phenomenon.
Speaking of bonds, attractive fixed income investment opportunities can be found across the region.
Latin America is a region rich in these opportunities.
So you’re finding relatively high yields that are not completely justified by relatively solid fundamentals, right?
In terms of equities, it’s probably Asia Pacific, India is a secular growth region that favors tech in emerging markets, and Asian markets dominate.
Consider the world’s largest chipmaker, based in Taiwan, and the world’s largest memory chip producer, based in South Korea.
Taiwan and South Korea are some of our favorite markets that are in the midst of an artificial intelligence revolution.
You mentioned elections here too.
So, obviously the top priority is, what impacts or ripple effects our elections might have on emerging markets?
absolutely.
Well, given that Trump and Biden have vastly different views on how the US should engage with the rest of the world, we can conclude that there will be consequences, right?
The Biden Administration 2.0, as we know it, will be a AAA globalist that works with allies to achieve its geopolitical goals.
Will the Trump administration turn inward and focus more on its own means?
And this will have an impact on relations with the United States.
Against Mexico, China and Ukraine.
Those are some of the main advocates, right?
Of course, there are winners and losers in the Middle East.
But overall, as you know, all countries around the world are watching this election very closely because it affects their economies and their political relations with the largest economic power in the world.
These are the two regions you mentioned earlier.
I mention India and China because of the divergence we are seeing in equity performance.
This is a trend that looks set to continue for some time.
And what does that mean?
What do we think?
So, when it comes to the equity world, these are very different markets.
India is attractive from a long-term growth perspective.
Well, advocating for demographic reform, geopolitical statehood.
Now you’re paying a high price for it, right?
The Indian market is trading at over 21 times earnings, almost 24 times, which is expensive both historically and compared to other markets.
There’s a lot of good news on pricing, so we think the earnings growth trend will keep the market going. We expect earnings growth of 15% this year and next.
Well, this is a carry play based primarily on earnings growth.
China.
On the other hand, trading is much cheaper.
You know, there’s a lot of bad news out there about China equity valuations.
Therefore, a sharp rerating of Chinese stocks or other scenarios may occur depending on the geopolitical situation, domestic politics, domestic economic trends and advertising valuations.
So there are broader implications when it comes to China.
Hey everyone.
I’m always glad you came.
Thank you very much for coming to the shoot today.
Thank you for your time.
