It was a mixed month for emerging markets in November, as shifting expectations about a trade deal between China and the United States continued to drive market sentiment. Our emerging markets equity team explains why US-China trade issues may not be that big of a concern for some emerging markets, and provides an overview of the news and events shaping markets during the month.
Three Things We’re Thinking About Today
- MSCI completed the third phase of the 20% partial inclusion of China A-shares in its benchmark indexes during November. Following the increase, the MSCI Emerging Markets Index included 472 China A-share companies with a total weighting of 4.1%. If and when all China A-shares are included in the index, they could account for over 16%, bringing China’s total weighting to over 40%. The increased exposure is likely to result in additional inflows in China’s domestic A-share market, which, along with improving liquidity, could provide better market accessibility to a wider range of companies in structural growth sectors such as health care, technology and financials. An aging population and rising health care costs should drive demand for health care, including services provided in facilities such as hospitals and clinics. Technological advancements and infrastructure development—including 5G and Internet of Things—are important investment themes. We believe the financials sector also stands to benefit from structural reforms as financial institutions are playing an increasingly important role in the efficient allocation of savings and resources.
- Environmental, social and governance (ESG) analysis is an essential and integral element of our due diligence and is incorporated into our research process. We believe that ESG factors can have a material impact on a company’s current and future corporate value and are an embedded component of the rigorous fundamental bottom-up research our team conducts. As part of assessing a company’s sustainability, we seek to develop a deep understanding of a company’s ESG practices, with the goal of identifying business models that are most likely to sustain high returns and resist competitive pressure over time. Our analysts consistently evaluate material environmental and social issues such as raw material sourcing, waste disposal and safety practices. In assessing corporate governance, we evaluate factors including capital allocation, management track record and conflicts of interest. When potential concerns arise, we believe engaging is in the best interest of our shareholders and will lead to better returns.
- We believe that, at its core, corporate governance determines how well companies are able to operate in the longer-term interests of all shareholders. Take, Russia, for example. Most investors are unlikely to associate Russia with governance excellence. Yet, many Russian companies have taken the initiative to set higher governance standards and promote shareholder value. As a result, we have seen companies adopt international standards, implement share buyback programs and raise dividends to enhance shareholder value. Indicating the shift in corporate mindsets, the dividend payout ratio in Russia increased from 21.8% at end-2013 to 33.0% at end-2018.1 Despite this, Russia remains one of the most undervalued markets globally, trading at a forward price-to-earnings multiple of 6x and a dividend yield of 7%, as of end-November.2 Overall, we believe Russia continues to offer interesting opportunities for emerging market (EM) investors through exposure to select, well-established companies across the information technology, financials, energy and consumer-related sectors.