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26-03-2024 · Interview

Optimize your emerging markets allocation

Robeco’s EM ex-China strategy lead portfolio manager Rob Schellekens talks about the launch of the strategy and which markets the team is excited about in 2024.

    Authors

  • Rob Schellekens - Portfolio Manager

    Rob Schellekens

    Portfolio Manager

Summary

  1. The strategy allows investors to choose an optimal allocation in emerging markets

  2. The focus on smaller, under-researched markets presents bottom-up opportunities and diversification benefits

  3. Positive on outlook for Mexico, UAE, Greece and Hungary

What prompted Robeco to launch an EM ex-China strategy?

We have been thinking about the viability of an EM ex-China product for a couple of years. In fact, we started running a paper portfolio in March 2021. This was in part because China was becoming an increasingly larger weight in the MSCI EM Index and overshadowing other interesting investment themes in the EM space. At the same time, we also found that during client meetings we were increasingly receiving more and more queries about China’s significant weight in the index, its risks, and ultimately about emerging markets ex-China strategies.

These clients, for their own reasons, were looking for ways to calibrate their China exposure and create their optimal EM allocation. Considering that we have a strong EM product line with a proven process and philosophy, it made sense to introduce an EM ex-China strategy to the mix. Through our fundamental emerging markets products, investors now have the flexibility to hold a traditional EM strategy, hold EM ex-China as a standalone investment, or combine EM ex-China with our Chinese Equities strategies to create a customized solution tailored to their needs.

Is this a reduced risk strategy compared to the core EM strategy?

While it does remove that single country risk, every EM country has its own risk profile. Global markets are never completely smooth sailing, and we have to remain very vigilant. That’s why we use our five-factor country analysis framework, combined with an integrated ESG approach on a country and on a stock level to inform our decision-making.

How does the sectoral landscape differ?

Robeco’s emerging markets investment process does not have a sector bias. The sector allocation is an outcome of our country allocation and stock selection as we follow a top-down country selection and bottom-up company level selection investment process. However, the sector make-up of the traditional EM index diverges significantly from that of the EM ex-China Index, so that does change things.

Notably, the consumer discretionary and communications services sectors have less weight without the large Chinese internet giants such as Alibaba, Tencent, Baidu and Meituan, as similar-sized companies in EM outside of China simply don’t exist at this stage. Conversely, IT, and specifically semiconductors and tech hardware, enjoy a much greater weight. Many of the global leaders in IT and their supply chains are based in South Korea and Taiwan, with TSMC being the bellwether in the sector. With some 1,200 companies to invest in and a combined market capitalization of around USD 5 trillion, EM ex-China is very much a rich source of opportunities.

Calibrate your emerging markets exposure

Is the sustainability profile similar to the core EM strategy or is it more challenging to find sustainable investments?

It’s similar. We embed ESG in all our investment processes. And, like the core EM strategies, this strategy has an Article 8 label within the SFDR classification, follows the same exclusion policy, and uses voting and engagement as an additional tool. Disclosure levels are now of a relatively high standard in emerging markets. I joined the EM team in 2006, and I remember doing our first ESG survey, which we actually sent out to the sell-side analysts. There was no third party data available at that time, and companies had no ESG departments. The contrast with today is dramatic and it shows how far emerging markets companies have come in their level and quality of data disclosure, and that’s a good thing for investors.

Which markets that are underrepresented in core EM have the best bottom-up opportunities?

There are a number of smaller markets which we deem attractive and have an overweight in, not only from a top-down perspective, but also from the bottom up. One example of this in Asia is Indonesia, a resource-rich country that is the world’s largest nickel producer – a key component in EV batteries. It has just had a presidential election in which the winner is expected to continue the successful policies of the previous incumbent. We are seeing consistency in the direction of the economy, and the policy framework while economic growth has been robust. Corporate earnings growth has been above the EM average and there are some great opportunities to invest in particularly in the banking and telecom sectors.

And beyond Asia?

The Middle East accounts for almost 10% of the index, so it’s sizeable, but valuation-wise it is relatively expensive. Within that regional context we like the attractively valued UAE market in which we have a bigger overweight. Underpinning the fundamental drivers in the UAE are the population growth and tourism industry growth, which both have good momentum. Here we favor the real estate sector which stands to benefit from these trends, but also some of the utilities companies and toll gate operators. Saudi Arabia is of course the largest market in the region and perhaps one of the most dynamic in many ways, but at the same time one of the most expensive in EM. Vision 2030 is really changing the country at a tremendous rate and consequently it is presenting interesting investment opportunities. We have limited exposure via financials and consumer names.

We also like Mexico, and have a sizeable overweight in that market. We like the domestic dynamics, but we are also benefiting from the near shoring theme that’s ongoing in the US, which is basically bringing supply chain closer to home in a market which is a competitive to manufacture in, and has a different risk profile compared to sourcing in Asia.

How about Europe?

We’re overweight Central Europe and we like Greece and Hungary. These are fertile markets for the bottom up approach. Greece scores well on our country allocation framework, with really strong growth and still-cheap valuations, so it ticks all the boxes. Hungary is also a country that we like from both an earnings outlook and valuation perspective. Here we own a couple of companies – one in healthcare and one in financials.

Why are you excited about launching the strategy?

I believe that this new strategy exists in a very diverse and interesting investment universe. The dynamic macroeconomic backdrop, attractive valuation and robust earnings growth outlook means the timing of the launch looks good, and we will find more world-class companies that we can hold for the long term.

Emerging Markets ex China Equities F EUR

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Important information This disclaimer applies to any documents and the verbal or written comments of any person in presentations or webinars on this website and taken together is referred to herein as the “Information”. The services to which the Information relate are NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws and must not be relied or acted upon by any other persons. This Information does not constitute an offer to sell, or a solicitation of an offer to buy, any financial product, and may not be relied upon in connection with the purchase or sale of any financial product. You are cautioned against using this Information as the basis for making a decision to purchase any financial product. To the extent that you rely on the Information in connection with any investment decision, you do so at your own risk. The Information does not purport to be complete on any topic addressed. The Information may contain data or analysis prepared by third parties and no representation or warranty about the accuracy of such data or analysis is provided.
In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management UK Limited (“RIAM UK”) is authorised and regulated by the Financial Conduct Authority. RIAM UK, 30 Fenchurch Street, Part Level 8, London EC3M 3BD (FCA Reference No:1007814). The company is registered in England and Wales under Ref No. 15362605.

In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management B.V. is authorised as a manager of UCITS and AIFs by the Netherlands Authority for the Financial Markets and subject to limited regulation in the UK by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.