As allocators continue to race into AI companies in emerging markets, entire industries are being overlooked, including financials, leaving plenty of available opportunities.
Matthews’ executive chairman Mark Headley sees opportunities in emerging and frontier markets outside the overcrowded AI play, but “patience and a strong stomach are required.” The AI trade in emerging markets is driven, at least in part, by the overrepresentation of chip companies in Asia and in EM indices.
“People obviously want and will pay for AI — but the build out level is nuts,” Headley told Institutional Investor. “Whole sectors like financials are being ignored.” He also noted: “The AI plays in Asia have corrected massively, so even they can be seen as value plays at this point.”
Headley has “seen capitulation selling in China, Indonesia and Brazil.” But he argues against investing in Brazil and Indonesia because these markets require serious corporate governance and fiscal management reforms, as well as real government-backed growth initiatives. And that’s a tall order. “The carnage in the Indonesian and Brazilian markets are reminiscent of some of the last 30 years’ ugliest moments,” he said.
All of these challenges have pressured active managers “to constantly stay close to their benchmarks,” he says, adding that this can inhibits long-term decision-making.
Headley admitted that while EM equity growth is “not very exciting” nor the path for overnight alpha, that may not be a bad thing. “I honestly hate the big sharp rallies like we saw in March and April — they almost never last,” he said. Instead, he’s hoping for mid-teen earnings growth.
With P/Es “generally very reasonable,” even a small improvement in earnings could fuel a recovery. Strong returns, and an overconcentration of large-cap tech stocks in the U.S. have led large allocators to slowly but steadily migrate capital overseas. That may lead to some strong returns over time. As the Matthews portfolio manager previously told II, “emerging markets are significantly under-owned” and “these regions have hundreds of underresearched and misunderstood companies.”
