Until recently, you’d be forgiven for dismissing emerging market equities. The wider index has gone nowhere for the better part of half a decade, while fears over China continue to spook investors1. Yet the growth baton is now passing from China to India, providing fresh reasons for optimism among discerning EM equity investors, says Loomis Sayles’ Ashish Chugh.
Equity markets have been increasingly upbeat since the beginning of 2024. So much so that Goldman Sachs recently said its ‘Risk Appetite Indicator’ – a measure of enthusiasm for risk across a wide range of asset classes – was close to its 2021 highs, and moving towards the highest levels since 19912.
Even emerging market equities are getting in on the action. In the Middle East, for instance, Saudi Arabia leads several countries across the region that are reforming fast.
“If you look at the countries that are up and coming in the Middle East, such as Saudi Arabia, UAE, Oman and Qatar, they are reforming – and reforming their capital markets,” said Ashish Chugh, Portfolio Manager of Global Emerging Market Equities at Boston-based Loomis Sayles.
“Traditionally, [Middle East] companies that would go public were spin-offs of government companies, which tended to be oil and gas, or financials. Now, with the reforms, you have more companies going public that are not government-owned, and they are in broader sectors, like technology, consumer goods and healthcare.”
Interest in Indian companies in particular has blossomed as investors increasingly shift their EM investments away from China3. A protracted downturn in the property market, tepid export demand, and subdued consumer spending are all weighing on China’s post-Covid economic recovery.4
China’s challenges
Ashish thinks China’s long-term structural issues will persist, with the biggest challenge stemming from the real estate sector.
“We’ve seen this in other emerging markets and it takes many years for it to work out,” he said. “The Chinese government announced they are going to create a fund that’s going to buy up unsold property, but that’s not sustainable – it’s not the solution. Every time you build infrastructure and real estate it needs to lead to productivity improvement for it to create GDP growth.
“But they overbuilt, basically boosting GDP through the real estate sector, which makes up 40% of the economy. And a large portion of consumer wealth is tied up in property assets. Related to that is the fact that real estate loans have stretched Chinese banks, which are 100% state owned.”
He went on to explain how the Chinese political system, which has changed from “one party to one man” has led to policies and actions that have created further economic challenges, such as the prolonged Covid shutdown or the crackdown on the tech sector. There’s also ongoing US-China trade tensions, coupled with the fact that China is exporting excess capacity amid the longest and deepest deflation since 1998-99.
And finally, there are demographic challenges. Ashish pointed out that China’s ageing society has a median age of 39, while the dependent – or non-working age – population is growing faster than the working age population. This creates a different consumer proposition – and if China’s sluggish labour market persists, it would continue to hinder household sentiment and consumer spending.
Thank you India
China’s woes have presented an opportunity for India to shine. The country is projected to be among the fastest-growing major economies over the next decade, with GDP growth expected above 6%5. This growth is fuelled by India's large working-age population6, rising middle class7, and continued urbanisation8 and industrialisation9.
Investment opportunities can be found across several high-growth sectors driven by favourable demographics, rising incomes, and supportive government policies. India's booming tech industry, for instance, which is fuelled by digital transformation and the government's 'Digital India' initiative10, offers prospects in areas like software, IT services, fintech, e-commerce, and emerging technologies (AI, cloud, cybersecurity).
The government's focus on infrastructure development, including roads, railways, airports, and urban infrastructure, also benefits construction, cement, and capital goods companies11. Then there’s healthcare12, renewable energy13, and consumer goods companies.
Meanwhile, a third consecutive term for the ruling National Democratic Alliance – led by the Bharatiya Janata Party (BJP) and its leader, Prime Minister Narendra Modi – is expected to provide policy continuity and stability, potentially boosting sectors like financials, consumer discretionary, industrials, infrastructure, and public sector undertakings (PSUs).
“Half the portfolio is in India,” said Ashish. “India will soon become the third largest economy in the world. And the reason we have such a big exposure to India is because there are so many great bottom-up fundamental opportunities. And that is partly the result of the last decade under the Modi administration.”
Connecting the dots
That’s not to say it’s any easier to find high-quality companies in India than in any other EM region. Ashish explains: “90% of companies in EM are low quality. You really have to turn over a lot of rocks to find those that are worth investing in. The good news is that, because they’re so rare, you often get richly rewarded.”
Ashish, who has been involved in emerging market investing for nearly two decades, points to his team’s ‘private equity (PE) approach’ as being fundamental in identifying high quality companies, and companies transitioning to become high quality, that are trading at significant discount to intrinsic value.
“Many firms only perform tip of the iceberg research – meeting with CEOs or CFOs, listen to earnings calls, look at the filings, and talking to the sell side,” said Ashish. “We are going way beyond this. We have an organic process for gathering data and researching companies, involving meetings beyond the top team, speaking to suppliers, customers, distributors, ex-employees, competitors, PE investors, and so on. We connect the dots from many different sources.”
It’s an approach that is just as much about the people in the team as the process itself. Ashish continued: “Our passion for the PE approach to research means we look only for those analysts who are collaborative, competitive, and willing to debate and discuss stocks, which means taking ownership of the portfolio, not just the stocks they’re researching.”
Crucially, the team has the facility to exchange investment insight with other research teams from Loomis Sayles’ emerging markets discipline, covering corporate research, sovereign research, currency, macro and ESG. For Ashish, getting insight into what emerging market debt markets are thinking gives the team a head start. He said: “We always say that EM debt markets are good early indicators, ahead of equity markets”.
In India, in particular, the EM equities team’s active, selective approach allows it to focus on quality companies with strong fundamentals, sustainable growth prospects, and reasonable valuations – particularly in those sectors driving the country’s relatively recent economic momentum.
Taken together, these “key sources of edge”, as Ashish puts it, are true differentiators for his team. And with many global investors still regarded as ‘tourists’ in emerging markets, the opportunities for Ashish’s team to continue to generate alpha are looking ever more promising.
