The Decade In Emerging Markets Starts Now

Summary

• COVID-19 has ignited a movement to diversify global supply chains away from China. Countries within Emerging Asia stand to reap most of the benefits via enhanced direct investment.
• GMO research highlights a greater than 13% differential in expected annualized real returns favoring value stocks in emerging markets versus large cap stocks in the U.S.
• Emerging-market central banks have embarked on government bond buying, a.k.a. quantitative easing, in response to the pandemic. Another policy tool available is the capacity to lower interest rates dramatically.

The coronavirus has exposed corporate America to weak links in global supply chains. As companies seek to reduce dependency on China, let’s examine implications for global investors, and identify those that stand to benefit within emerging and frontier markets.

Source: FT.com

Supply chains will also be affected by currency wars, nationalism, and protectionism, which are all on the rise -

Vikram Mansharamani - Author & Lecturer at Harvard University

Bloomberg recently reported “the world’s electronics makers are actively seeking ways to diversify their supply chains.” Apple for example, announced that over-ear AirPods will be manufactured in Vietnam. While private investment group VinaCapital declared that registered foreign direct investment into Vietnam, through May '20, has increased 19.9% to US$10.9 billion even in light of the COVID-19 lockdown.

India also represents a natural destination with its low cost, highly skilled and english speaking workforce, where they already produce 40% of all generic drugs consumed in the U.S. But perhaps just as urgent, companies want access to its growing market of 1.3 billion consumers. Facebook for example, in the midst of the most recent shelter in place, announced a $5.7 billion investment in Reliance Jio, India’s largest telecom company.

For investors, in addition to Vietnam and India, countries such as Indonesia, Taiwan, and Brazil are clear beneficiaries as corporations seek to invest in and diversify global supply chains.

Valuation & Return Forecasts Grossly Favor the Emerging World

Exhibit 1 shows that EM equities are trading at a 55% discount to U.S. stocks based on Shiller’s CAPE ratio. Keep in mind, based on this metric, U.S. stocks are trading within the highest 10% of historical price earnings multiples.

Exhibit 1:

COUNTRY/REGION	CAPE Ratio
Emerging Markets	13.7
Emerging Asia	14.4
BRIC	13.6
United States	30.4

Click to enlarge

(OKADA) Source: Star Capital, multpl.com, as of 5.31.2020

Analyst’s Disclosure:I am/we are long DVYE, SMIN, FM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.