Are emerging markets the future? | 05/14/22

About a decade ago, when investors were still enthusiastic about emerging markets and underestimating the United States, Rocher Sharma described the United States as a “returning nation” and rightly predicted a bull market would follow. Today, Sharma is CEO of Rockefeller International, the international arm of Rockefeller Capital Management, and sees the best opportunities outside of China and the United States, the world’s two largest economies.

Written by Reshma Kapadia, Barones. Translation: Laura Marcus

Sharma joined Rockefeller in February after spending 25 years managing investment at Morgan Stanley, most recently as global chief strategist. The company has $95 billion in client assets under management. Sharma is also in the process of establishing a new investment firm called Breakout Capital in partnership with Rockefeller. She will focus on emerging markets and global wealth allocation, Sharma’s specialty.

Sharma recently spoke to Miami’s Barron’s – one of his touch points during the coronavirus pandemic – about the challenges facing companies and investors in China. He also explained why he has shunned Chinese tech stocks like Alibaba and global luxury firms, and why investors need to reconsider their growth forecasts. Below is an edited version of the conversation.

Barron: How will the war in Ukraine affect stock markets?

Rocher Sharma: Currently walking [die Anleger] I suppose this is a marginal conflict – and a long, hard war. It will affect things in decimal points rather than percentage points.

I’m not worried about China joining Russia and World War III. China is more firmly rooted in the Western financial system and cares about it much more [Russland]. This limits China’s ability to act and keeps it in check. China’s economy is also weak – and the country places great value on its economy.

Could Chinese President Xi Jinping be denied a third term in the fall given recent economic problems and the consequences of strict coronavirus lockdowns?

no one knows. But China is walking away from one of its most significant achievements of the past 40 years: no head of state has been allowed to hold office for more than two terms. It has always led to renewal – to a change of leadership. [Wenn Xi eine dritte Amtszeit bekommt,] It would be a big step. I am more concerned that the Chinese economy may lose stability over time.

Another concern is China’s debt and the consequences of debt-led growth in the past decade. something is the same [des Schuldenproblems] Informed, and for this reason is trying to restrict the real estate sector. [Top-Wirtschaftsberater] Liu He knows how debt makes the economy weak and that former Chinese empires have collapsed because of debt. But whenever they want to get rid of indebtedness, the economy weakens and they take on more debt.

Should foreign investors and companies continue to invest in China?

China is an emerging market that I am not very excited about. Everyone needs to think about how to diversify outside China. The danger is not that China will get embroiled in the Ukraine war or engage in conflict with Taiwan. These are unexpected risks. My main concern is the problems posed by the Chinese growth model. The demographic challenges are real: China’s population is shrinking for the first time in history. When that happens, no economy can grow at any significant rate. China will struggle even close to 5 per cent growth.

How will globalization continue in this environment?

It’s more bilateral and regional [Handels-]expected agreement. Take India, for example: the United Arab Emirates is one of the country’s largest trading partners, and relations with Saudi Arabia are getting stronger.

Even with digitization, we will see a slowdown in globalization because there is now a much stronger sense of nationality [und die Länder] They want the data to remain in their country. All areas of globalization are threatened.

We will see the pandemic and the invasion of Ukraine as the beginning of a very big shift in the global economy. Nobody becomes his business [in China] surrender and retire to your country; A lot has been invested in it. But every step, no matter how small, will be about having supply chains in more widespread and safer areas. This will show up in margins and earnings, not in a quarter or two, but maybe 10 to 20 quarters.

What does that mean for investors?

Profit margins are under pressure worldwide. The bright side: the disparity may gradually improve. In the next five to ten years, the balance of power will shift in favor of workers as companies now have to be closer to home and think more about safe labor than cheaper labor.

Who are the winners and losers?

Some luxury global stocks may soon outperform as the era of asset-price inflation-driven wealth growth fades. Alternatively, core consumer goods companies that cater to more low-to-mid-range segments could do much better given their bargaining power and wages. [dieser Gruppe] He increases.

Chinese stocks fell, especially internet companies like Alibaba and Tencent. Do you still want to own Chinese stocks?

I will continue to invest in China but I want to keep my exposure low there due to the economic risks. I’m not interested in Chinese tech companies. Your business models are permanently corrupted. However, in the ruins we can find some high-quality Chinese stocks, for example Haidilao. But the future of the next ten years belongs to the smaller countries. The United States and China are over-represented in portfolios.

American bias has been beneficial to investors over the past decade. Why should you diversify?

Every decade, a new investment theme dominates the world: in the 1980s, it was Japan that captured 50 percent of global market capitalization in 1989. In the 1990s, it was the US technology industry. Ten years ago, emerging markets couldn’t get enough and rushed to embrace the BRIC countries (Brazil, Russia, India and China) believing they were the future of the world. You have declared that the United States will be the returning country. The US stock market tripled and emerging markets were flat. Now I feel the opposite.

The United States accounts for 62 percent of global market capitalization, but only 26 percent of the global economy. The market capitalization of emerging countries is 11 percent and their economic size is about 35 percent. Investors invest very little here.

Emerging markets are not immune to economic challenges. Where are the best opportunities?

Growth expectations must be tempered everywhere as all economies face the same challenges: de-globalization, demographics, and rising interest rates at a time of rising debt around the world. However, there are relative winners. India, for example, could do well, but the new measure of success is growth above five percent, rather than seven to eight percent.

Commodity prices are the best indicator of the performance of emerging markets. The 1970s were the best years for emerging markets – even before the MSCI Index. Usually, if you are primarily optimistic about commodities, this should be reflected in the good performance of emerging markets.

I love Indonesia and companies like [den Mischkonzern] Astra International and Bank Central Asia, a leading bank with strong digital initiatives. I also like Brazil with companies like Petrobras, Vale and a large part of Latin America doing better with higher commodity prices.

What other things are attractive besides raw materials?

Diversification away from Chinese production benefits Vietnam, Bangladesh and possibly Indonesia. In industrialized countries, there is a significant inflation of digitization, but it is still in its infancy in emerging countries.

India can benefit greatly from this. With better technology and digital infrastructure, government support is reaching the poor in ways that were previously not possible. Digital Transformation Winner: Bharti Airtel. These are the small changes taking place in India, Indonesia and elsewhere. I know 50 high-quality companies in emerging markets outside of China with a market capitalization of over $1 billion that can bet on this trend.

How are they classified?

Quality firms in emerging markets trade at a significant discount to those in developed markets, with opportunities in consumer and technology, apart from major tech stocks. Of the 200 economies in the world, more than 150 are classified as emerging markets.

What do investors need to know about the US dollar?

The average life of a reserve coin is usually around 100 years. The US dollar has been a reserve currency for nearly 100 years. Before that it was the British pound. A look at net foreign assets in dollars shows how high the US external debt is: the US net external debt is currently around $16 trillion. This equates to about 70% of the United States’ GDP. In the past, a reading above 50 percent was a sign of problems with the local currency. The US dollar appears to be exhausted.

From an economic point of view, sanctions against Russia have raised doubts about the US dollar standard. The renminbi would have been a good successor, but the Chinese financial system is very fragile and its accounts are not convertible. There is no alternative today, but something is slowly happening.

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