An Active Investor’s Guide To Emerging Markets Stocks

Emerging markets (EMs) are a big, heterogeneous universe of economies and markets that can be subject to big volatility. They also are a large and fertile hunting ground for investment opportunities. Stock picker Emily Fletcher offers a grand tour of the “wild” EM equity landscape.

Emerging markets (EMs) have earned more mentions this year as their central banks were quicker than developed market peers to raise interest rates post-pandemic. This helped them to put a lid on inflation sooner in an effort to rebalance and set their economies up for growth. The opportunities in EMs are many, but the universe is vast and the risks can be significant.

Emily Fletcher, an emerging markets portfolio manager within BlackRock Fundamental Equities recently joined The Bid podcast to offer her observations as an investor who is meeting with companies and handpicking stocks across the world’s developing economies. We offer excerpts of that conversation here.

What’s the difference between developed and emerging markets?

The definition of emerging markets is all about the level of development of the stock market. Those that have the most developed systems in place are classified as developed markets, and those with less comprehensive trading systems are classified as emerging markets.

In terms of what really sets apart emerging markets from developed markets, I think it’s the complexity, the volatility, and the dispersion that we see across the universe.

In terms of complexity, we’re talking about 25 countries, each with its own political and economic cycles. They all have their own currency and bond markets. In aggregate, the markets trade for 20-plus hours a day over six days a week, whereas developed markets tend to have harmonized economic cycles.

In terms of volatility, the emerging market index has had a peak-to-trough move of more than 20% in 19 of the last 20 years. And on top of these index-level moves, we see huge dispersion between stock performance. Typically, two-thirds of the stocks within emerging markets move more than 40% in each year. This makes it a fantastic place to be an active investor because you’ll get an opportunity to buy most companies at some point during each year.

“What we have is a wild, exciting, volatile hunting ground for active investors who can benefit from the complexity of 25 nonsynchronous markets, offering 4,000 highly diverse stock opportunities.”

How is the inflation and rates picture different in EMs?

Emerging markets started raising interest rates first (ahead of developed markets post-COVID), and they’re likely to be the first to cut interest rates. And as those interest rates come down, we should see consumers and companies that will end up with more money in their pockets as the cost of debt becomes cheaper. We should then see growth accelerate across emerging markets. That turning point is normally a time when emerging market equity markets start to do quite well. It’s a good time to think about investing in these countries on the back of that cyclical activity pick up.

How do you parse potential winners and losers in EMs?

Emerging markets are really about pulling together all the sources of information. So, what is happening in a country is important in setting the backdrop for where you should be looking for stock opportunities. Then it’s about digging in. The 4,000 different stocks within emerging markets will all have their own specific company drivers and all trade with additional dispersion on top of that. It’s a huge amount of information to pull together, and you really want all of it to be pulling favorably to find the best opportunities ― to be a great company, a great stock, in a great market, and to pick it just before the turning point and then you can do well. That need to have all of those boxes ticked is what makes emerging markets so interesting from an active perspective.

What are frontier markets?

If we go back to the difference between emerging and developed markets being around the level of development of the equity markets, frontier markets are really just a step down from that. It’s the set of markets that are even less technologically developed than emerging markets. Or it can be the set of markets that trade with lower liquidity than emerging markets, so where you see a much smaller volume of trades executed over any given year.

What’s been interesting over the last 10 years since I started looking at frontier markets is that we have seen quite substantial technological advancements in a number of stock markets that would’ve historically been considered frontier markets, such as Saudi Arabia or Qatar, and very much now promoted to become emerging markets.

How can investors manage the volatility inherent in EM investing?

That’s a very fair point to pull out and especially in some of these smaller markets. In and of themselves, they can be inherently and deeply risky and volatile. But one of the really interesting things about these smaller markets is that if you create a basket of them, put together a portfolio of them, you generally end up with something that in aggregate is much less volatile than if you were to look at emerging markets at the index level.

These are places in the world where you can still find diversification. There are generally minimal trade flows between smaller emerging and frontier countries, so problems in the real estate market in Vietnam will tend to have no impact on the level of oil production in Argentina. The recent election in Thailand had no impact on the subsequent Greek election. Constitutional change in Chile won’t impact interest rate movements in Saudi Arabia. So, it’s very interesting that you still have huge benefits of diversification from looking at some of these smaller markets.

Any highlights from your many country visits?

I’ve been to about 35 emerging market countries now. I reckon I probably could have a successful second career as a travel agent. I would highly recommend visiting the mountains in Oman, the Polo Club in Lahore, Pakistan, the dead cow oil fields in Argentina, and there are some fantastic palm trees inside the Central Bank of Kuwait. My favorite food comes from Vietnam, but the best meal I’ve ever eaten was in Mexico.

Investing involves risk, including possible loss of principal. Stock values fluctuate in price so the value of your investment can go down depending on market conditions. International investing involves additional risks, including risks related but not limited to currency fluctuations, illiquidity and volatility. These risks are magnified for investments in emerging markets.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2023 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive, and are not guaranteed accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees, or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results.

Investing involves risk. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Diversification does not ensure profits or protect against loss.

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