The landscape of emerging markets has undergone significant changes over the past year. Whilst market uncertainty and geo-political risks remain, Amit Goel, Portfolio Manager for the Fidelity Global Emerging Markets Fund (Fund) and Active ETF (ASX: FEMX) explores what is happening in in the region and where he believes future opportunities lie.
China: From downturn to optimism
China's market has experienced a dramatic turnaround. After a deep property down cycle and weak equity markets in 2022 and 2023, green shoots have appeared in 2024, making China the best-performing emerging market. The market rally has been driven by large caps in financials and tech sectors, buoyed by stabilisation in the property market and consumption.
The Fund is now significantly overweight China, reflecting increased confidence in the country's economic fundamentals. Property sales and prices have started to recover, which Amit believes is crucial for the cyclical upturn in the Chinese market. The Chinese government's recent coordination plan aims to address structural issues such as wage growth, unemployment, and birth rates, further driving the economy through consumption.
Narrow market rally and broader optimism
While the market rally in China has been narrow, driven by the top 10 stocks in financials, internet, and tech sectors, Amit expects this rally to broaden over the next 12 months. This would benefit consumer stocks and broader economy stocks that are currently undervalued. The DeepSeek phenomenon, an open-source model driving innovation in tech companies like Alibaba, Tencent, and Baidu, further enhances the medium-to-long-term prospects for China.
India: Navigating a cyclical downturn
India's market has taken a different path, experiencing a cyclical economic downturn since 2024. Government capital expenditure (CAPEX), consumption, and private CAPEX have slowed, resulting in a GDP growth reduction from 7% to a range of 5-6%. The Indian government has recognised the need for a medium-term re-balance of the economy, with tax cuts for the middle class and welfare schemes for the lower middle class.
Despite the downturn, Amit remains bullish on India's long-term prospects. The Fund has been cautiously positioned in large banks, healthcare, and IT services, contributing positively to performance. He would consider more India exposure once earnings downgrade cycles stabilise or valuations become more reasonable.
Financial holdings: defensive and predictable
The Fund's financial holdings in India, primarily ICICI Bank and HDFC Bank, have remained defensive during the downturn. These banks have predictable earnings, strong underwriting franchises, and lend to top customers in good shape. Amit expects these banks to continue outperforming the market, even as economic conditions improve.
The Fund also has exposure to high-growth financials in Mexico, South Africa, Indonesia, and an exchange in Brazil. These financials are generally negatively correlated to rates, but Amit sees significant monetary loosening room in emerging markets, which could benefit these holdings.
Brazil: strong absolute upside
Brazil has faced a challenging environment with high interest rates, but Amit believes the starting point in Brazil is strong for absolute upside. Competitive businesses like B3 and Localiza are trading at historically low valuations, presenting significant opportunities for growth. Amit expects that the feedback loop of high rates slowing down growth and spending will eventually lead to lower rates and inflation, benefiting these investments.
Bull case for emerging markets
Emerging market returns have started to improve, with positive returns in the last 12 months. Amit sees strong absolute upside opportunities in China and Latin America, driven by low valuations, improving fundamentals, and significant monetary loosening room. Compared to stretched valuations and weakening conditions in developed markets, emerging markets may offer a compelling risk-reward profile.
The Fund is well-positioned to capitalise on these opportunities, with a large chunk of emerging markets capable of providing absolute returns without dramatic changes in the situation. Amit's constructive view on emerging markets highlights the potential for future growth and the unique advantages these markets may offer in the current global investment landscape.
With a constructive view on China and India, and optimism for Brazil and other emerging markets, we believe the Fidelity Global Emerging Markets Fund remains well-positioned for future growth. Amit believes that emerging markets offer a compelling case for investment right now, driven by favourable valuations, improving fundamentals, and scope for monetary loosening.
