Senior Investment Director & Portfolio Manager
Global Emerging Markets Equities
After some challenging years, the reopening of China, supply chain shifts, and other market factors point toward possible opportunities in global emerging markets for investors seeking income and long-term appreciation. In this CEF Insights Podcast episode, abrdn Senior Investment Director and Portfolio Manager Nick Robinson shares views on these opportunities and more views on the current market.
abrdn is a global investment company with 11 closed-end funds including the abrdn Emerging Markets Equity Income Fund, ticker AEF. The investment goal of the fund is to provide both current income and long-term appreciation by selecting companies in growing economies with strong governance and straightforward financials.
Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-end Fund Association. Today we are joined by Nick Robinson, portfolio manager with the Emerging Markets Equity Team for abrdn. abrdn manages a family of 11 US closed-end funds, including abrdn Emerging Markets Equity Income Fund, ticker AEF. Nick, we are happy to have you with us today.
Well, thanks very much. It's a great pleasure to get the opportunity to speak to you today.
Nick, abrdn is an active manager with a bottom-up approach that is focused on fundamentals. Can you discuss the investment strategy for emerging market equities and how that applies to AEF?
Yeah, sure. It'd be a pleasure. So the investment strategy we have is essentially focused on picking quality companies within emerging markets and then holding them for the long term. When we think about quality companies, we're really thinking about three different aspects of businesses. So those businesses which have good management teams and strong governance, which is particularly important in emerging markets where you're often not protected by legal frameworks. We also like companies which are in industries which are growing, where there's a good tailwind of potential growth behind the company. That's always quite helpful as a long-term investor.
And then also we are looking for companies with pretty straightforward financials. We're very happy to invest in companies with lazy or so-called lazy balance sheets where they might have net cash positions. So it's really finding companies that really fit into that quality aspect and then holding them over the long term and trying to be fairly diversified through emerging markets. So they're trying to be relatively diversified in terms of both countries and sectors and have most of the risk in the portfolio come from the stocks themselves rather than big benchmark positions against countries, for instance.
What is the advantage of this type of approach as you seek out opportunities in less developed countries?
Well, I think going back to the quality aspect of investing, I think that's quite important in emerging markets in that emerging markets tend to be a bit more volatile, be it due to the economic cycle or the political cycle, which can lead to quite large changes in the investment environment. So by choosing quality companies which don't have too much links with politics or have strong balance sheets that equip them to survive the cycle, then that's fairly critical given the high intensity or magnitude of those cycles.
And then also, as I alluded to, governance is a pretty key issue in emerging markets and that most companies, they tend to be controlled by families or individuals or single entities, whereas in more developed markets like the US, the shareholder base tends to be a bit more diffuse. So that means combining that with the weaker legal regulations and frameworks within emerging markets, which may not work when you need them to, investing alongside those entities where you feel comfortable being a minority investor is fairly key. So I think that's really important in terms of having the active approach towards emerging markets.
Nick, the US Federal Reserve aggressively raised interest rates for much of 2022 and other developed markets followed. Globally inflation has been high and economic growth has slowed. We also have significant geopolitical tensions that have added to volatility. How have these global challenges impacted emerging market economies as well as their equity markets?
Yeah, well, it's a good question. It's been pretty challenging couple of years for emerging markets. Emerging markets really were quite early to sell off relative to developed markets, really occurring right at the end of 2020 when markets started weakening. So it's been a pretty tough time for emerging markets. Of course, what happens when the Fed starts raising rates is that emerging market countries generally have to do the same in that if they don't, then they tend to get a lot quite aggressive capital flight from their countries, which can cause all sorts of fiscal issues.
I think what's been quite good this cycle is that emerging market countries were generally quite early to start raising rates much before the Federal Reserve did. So I think that put them in quite a good position last year not to suffer those capital withdrawals that we've seen in prior cycles, certainly not to the same magnitude that we've seen before. So coming forward to today, things are in a better position, but we are beginning to see signs that we may get some easing from central banks and emerging markets going forward, which would be beneficial to growth. But certainly you're right to point out, it's been a pretty tough couple of years for EM.
Do you expect these issues to have longer term impacts on these economies?
No, I don't think so. I mean, it's part of the cycle really. I mean, it's been a pretty brutal cycle in terms of the magnitude of the rate hikes coming out of the US. But yeah, I don't think this has really impacted the long term outlook for EM. And certainly relative to other cycles we've seen, I don't think it's been a particularly bad one from the context of emerging market countries.
Nick, you lived in Brazil for several years. They have some significant political changes with the results of the recent presidential election. How do you see this impacting the business environment in Brazil as well as opportunities for leading companies in that market?
Yeah, there always seems to be a lot of opportunity in Brazil, but it's only relatively infrequently that that turns into actual real growth for companies. And I think this election has been a fairly tough one for Brazil in that there had been quite a lot of optimism about President Lula as we went into the election, and certainly it looked like he was going to be a more centrist in terms of his governing immediately prior to the election. But then more recently, it appears that he's reverted to the kind of Lula of old, the type of Lula that was pulling the strings back in 2012 when President Dilma was in office. And that's not been great for markets in Brazil. I mean, that's essentially meant less fiscal discipline, which is something that Brazil desperately needs in order to control rates and inflation.
So I think things have been a bit tougher in Brazil, but that doesn't mean there's not some good opportunities there. Those companies that are good at passing through inflation, which is many in Brazil, should continue to do well. And of course, with Lula's tendency to spend and put more money in the pockets of citizens should be pretty good for domestic consumption. So there's a lot of domestic consumption companies which are very good, that you can buy in Brazil, which we think should benefit from this environment.
Emerging markets are often referred to as almost a single entity, but countries and regions can have very different economic scenarios and market dynamics. Are you finding equity valuations across emerging markets to generally be at attractive levels or does it vary between countries and industries?
Yeah, I mean, you do often get quite big divergences in valuations between countries, specifically within emerging markets, depending on which markets are seen as being particularly hot and which have gone out of favor. And those tend to move in cycles to some extent, although I'd say there are some countries which are always pretty cheap because they're seen as being quite risky to invest in, places like Turkey, for instance. But yeah, broadly speaking, valuations are very attractive at the moment in emerging markets, particularly relative to developed markets.
Where are you seeing the best opportunities as we are at the beginning of 2023?
So I think the really interesting thing that's going on in emerging markets at the moment, and it's probably been going on for only two or three months, so it's still relatively early days, has been the opening up of China. So you'll recall that China had a very aggressive zero-COVID policy that was very suddenly and quite unexpectedly relaxed at the end of last year, and thus the economy is now opening up. Consumers are basically out and about spending more, malls and supermarkets and cinemas are all filling up.
So I think that's essentially giving an awful lot of opportunities for investments that have a scenario where earnings expectations for Chinese corporates are now heading up quite quickly at the same time that other economies are either slowing down, not quite in recession yet, but certainly earnings estimates elsewhere are falling somewhat. So certainly the opportunity today, I think, in China is quite exciting, particularly given how that market has sold off an awful lot over the last couple of years, and valuations have become very reasonable.
How is the AEF portfolio currently positioned?
Yeah, so AEF is currently positioned really to benefit from that China reopening that I highlighted. So yeah, the portfolio has a decent exposure towards China and Hong Kong. And then the portfolio is also positioned really just to benefit from the growing middle class within emerging markets and the spending power that they have. So a lot of consumption stocks within the mix. And then we've also positioned the portfolio to really take advantage of some of the big longer term trends that we see in emerging markets. So that's things like renewables. So the kind of move towards the zero carbon transition. So investing in those companies, which, for instance, make solar panels or are in companies which provide raw materials to be in that supply chain. And that's an area where I think is particularly exciting for emerging markets, given some countries' dominance within that supply chain for renewables.
Nick, how do you see this emerging market equity strategy best positioned in an investor's diversified portfolio?
Well, I think emerging markets are coming into quite an interesting phase really at the moment. I think a lot of investors have not paid much attention to emerging markets over the last few years given the performance of developed markets, particularly the US, and the strength of the dollar as well has meant that as those trends have been ongoing, emerging markets have kind of been overlooked to a certain extent, given their poor performance.
But I would say that is changing now in that inflation seems to be rolling over, rates are being increased at a slower pace. And with China reopening, there's quite a strong earnings argument within emerging markets. So yeah, I think we are in a period where the outlook for emerging markets relative to developed markets is changing. So I would hope that investors are thinking at least of looking at emerging markets again as a good place to diversify equity allocations.
Nick, thank you for taking the time to share your thoughts with us today.
You're welcome. It's been fun.
And we want to thank you for tuning into another CEF Insights podcast. For more educational content, please visit our website at www.cefa.com. This material is not and is not intended as investment advice, an indication of trading intent or holdings, or the prediction of investment performance. All information is current as of the date of this presentation. Use and information expressed herein are subject to change at any time. Refinitiv Lipper disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources. However, Refinitiv Lipper does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell or solicitation of an offer to buy any security, product, investment advice, or service.
Audio recorded in January 2023.
This material is not, and is not intended as investment advice, an indication of trading intent or holdings, or the prediction of investment performance. All information is current as of the date of this presentation. Views and information expressed herein are subject to change at any time. Refinitiv Lipper disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources. However, Refinitiv Lipper does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or a solicitation to sell or a solicitation of an offer to buy any security product, investment advice, or service.
abrdn Incorporated disclaims any responsibility to update such views and or information. This information is deemed to be from reliable sources. However, abrdn does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell, or a solicitation of an offer to buy any security, product, investment advice, or service. Nor shall any security, product, investment advice, or service be offered or sold in any jurisdiction in which abrdn is not licensed to conduct business and or an offer, solicitation, purchase, or sale would be unavailable or unlawful.