Emerging Markets
Emerging market equities: Short-term pain, long-term gain?
Nick Grace
Equity Portfolio Manager
  • Emerging markets are not homogenous. Taking a bottom-up, idiosyncratic approach can help identify investment opportunities regardless of where companies are based or macroeconomic conditions. 
  • In times of heightened volatility, a patient approach and an extended time horizon can help unlock significant value over the longer term.


How should investors view emerging markets in the current volatile environment? 

There are two important aspects to keep in mind when investing in emerging markets. The first is time horizon. Taking a long-term view can unlock significant opportunities. The second is that if you can identify a unique insight, you can invest large sums over an extended time frame. 

Experiences earlier in my career have shaped the way I invest today. This included on-the-ground research in places yet to have investable opportunities.  But gaining this level of insight allowed me to invest early in China, as I argued that China would begin above-trend metal consumption as its economy opened up. 

That is a significant advantage of Capital Group’s genuine long-term investment horizon. Other examples of early insight included the concept of faster digital disruption in China due to a lack of legacy assets, such as large shopping malls, and its investment in high-speed internet networks. Investments in Alibaba and Tencent were based on this thesis. Another came three or four years ago when our research suggested that Brazil could be on the cusp of fintech disruption, on the basis that there was an oligopolistic banking sector and a regulator that wanted to introduce greater competition.

These insights allowed us to invest early and with a long-term view. It is the duration of these investments that is key in creating value in emerging markets.


Compared with developed markets, the policy responses to the COVID-19 crisis in emerging markets has been mixed. How could this affect economic growth?

It is true that many developing countries have been relatively slow to respond on the policy front, either because of fiscal constraints or mismanagement. 

And this is in stark contrast to policies adopted in developed markets, which have certainly helped to support markets at this point in the crisis.

However, as bottom-up, idiosyncratic investors Capital Group invests in companies, not broad markets or countries. Within each of these markets there are individual companies that can do well irrespective of the economic environment. For example, one of my larger positions is e-commerce operator Mercado Libre. It generates most of its business from Argentina and Brazil, which on the surface doesn’t sound appealing. Yet the company’s first quarter earnings showed healthy growth in e-commerce revenues and increased adoption of its fintech offering before the COVID-19 crisis hit, with the trend accelerating after the lockdown was introduced. This shows that even in a ‘bad neighbourhood’ there are individual companies that can thrive and grow.

Taking a domicile-agnostic view when investing can also help in this respect. I tend to be much more concerned about where a company generates its revenue than where it is listed. I can look for companies with exposure to a particular growth trend in emerging markets, regardless of where its head office is located.

Furthermore, there is very little correlation between economic growth and equity market returns in emerging market countries. Since 1999, China’s GDP growth has been four times that of the US, yet equity market returns for both countries were relatively similar1. So, I spend less time looking at economic growth, and more time on individual companies and industry structure to gain better insight into how these could affect growth at the company level. 

Emerging markets are volatile and may suffer from liquidity problems.

1. 10 years to 31 December 2019. Sources: Bloomberg, IMF. Equity index comparison: Shanghai Stock Exchange Composite Index and S&P 500 Index.


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or highyield securities; emerging markets are volatile and may suffer from liquidity problems.

Nick Grace is an equity portfolio manager with 32 years of investment experience (as of 12/31/2021). He previously covered global mining companies as an analyst. He holds an MBA from the University of Wisconsin and a bachelor's from the University of Waikato, New Zealand. Nick is also a CFA charterholder.

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.