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Alternative Market Briefing

The Big Picture: Current opportunities in China and LatAm (part I)

Tuesday, July 05, 2022

amb
Charlie Wilson
B. G., Opalesque Geneva:

The MSCI Emerging Markets Index was down almost 12% YTD at the end of May. And hedge funds are not doing much better as the HFRI Emerging Markets (Total) Index declined five consecutive months to start the year, falling -10% YTD through May, and the Eurekahedge Emerging Markets Hedge Fund Index is down -3.5%. But not all is gloom: emerging markets have their own cycles, and there are opportunities in places that benefit from commodity exports and private credit according to some, and it may be a good time to buy, say others.

Charlie Wilson, managing director at Thornburg Investment Management, gives us his take on the emerging markets' investment environment. He co-manages the Thornburg Developing World Fund, a $1bn equity portfolio that invests primarily in companies in emerging markets. The fund has annualised a return of +6.6% from inception in December 2009 to March 2022 - compared to +3.7% for the MSCI Emerging Markets NTR. Thornburg has $44bn in client assets and is based in Santa Fe, New Mexico.

In part I of the interview, Wilson talks about current opportunities in China and Latin America (LatAm).


Opalesque: What is the opportunity set in China?

Charlie Wilson: One of the surprises coming out of the Covid pandemic was how well China navigated the initial stages post-Covid. They were able to get back to work quite quickly. It was similar for both South Korea and Taiwan.

Unfortunately for China, they have remained in a zero-Covid policy framework which has hurt them more recently as the new variants become more transmissive, and so it is very hard for them to stop the spread of the virus through lockdowns alone. We have seen a large amount of China's GDP impacted in the recent past as they continue to pursue that zero-Covid policy. The leader coming out of the depths of the Covid crisis has become the laggard.

Layer on the fact that the Chinese Communist Party has been tinkering with policy, especially with respect to private industry, which was initially targeted toward the internet sector but has become more broad-based over time. There is a power struggle between the party and some private companies. That is also showing in consumer sentiment as animal spirits, which is another headwind for growth.

China is an area where there is a lot of opportunity; over the last year we have seen valuations reset quite substantially in China, and we are seeing the potential for them to get back to normal activity levels over the next few months and for more aggressive government support.

Opalesque: What about LatAm?

Charlie Wilson: Last year, we saw several elections or anticipations of new elections across Latin America that have led to some disruptions. In Peru and Chile for example, and Brazil this year, where we are going to see a new presidential election, elections have led to concerns around new policy adjustments that might be either in the pipeline or coming.

We are seeing parts of LatAm that have done a good job of vaccinating and getting back to work, where we start to have concerns about any potential policy changes in a variety of sectors, whether it be mining or extractive industries or policies of work program that lower the fiscal budgets, etc. That's an area where we are seeing extraordinarily depressed valuations that are quite attractive at this point.

Opalesque: What about the risks in LatAm?

Charlie Wilson: Typically when you come out of these phases of hype or escalated fear around political cycles within LatAm, it is a good opportunity to buy because it has never been as bad or as good as the markets think it is. And generally, for example, let's say if you have a left-leaning president, it's usually offset by a right-leaning congress so there is only so much they can do.

That's our guiding principle regarding LatAm: it is never as good or as bad as you think it is - and that presents opportunities.

Normally in an environment like this, we have really elevated commodity prices and that's usually very good for LatAm, especially countries like Mexico, Brazil, Chile, and to some extent, Argentina. But because of this political uncertainty, we are seeing very strong earnings in some of the export industries and commodity industries. Even in domestic consumption stories. But the valuation has come down mainly because of these concerns.

Opalesque: What is your current country exposure?

Charlie Wilson: Right now our largest position is in China, which is above 30% of the portfolio. Our second largest position is Taiwan. This is followed by India and Brazil - each about 10%.


Part II will be published tomorrow.


Related article:
20.May.2021 The Big Picture: Most emerging markets are on the path to normalcy, albeit on slightly shaky ground


Past Big Picture articles here:

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