LW: How are EM companies positioned for a global downturn?
Goel: Whenever we see the Federal Reserve tightening, there will be always effect on emerging markets. And that effects, or the quantum of that effect will depend on the financial position of every emerging market. And again, there's no single emerging market, it's a bunch of companies or countries at a very different point of evolution, demographically, socially, financially.
So, it's a different impact on every emerging market.
But what we see this time is that emerging markets are clearly ahead in the inflation and interest rate curve.
Inflation in large part of emerging markets, especially North Asia, is more manageable, low-to-mid single digit, so not very high.
Even in parts of South Asia like India, they've been higher than the normal optimum level, which reserve banks want them to be, but they're not significantly higher in double digits.
LW: Why should Australian investors consider economies beyond China and India?
Goel: I think what you clearly see is that there is a always a emerging consumer class in these markets. There is emerging digitisation of that consumer class, and there's clearly businesses which are very strong, even in a volatile environment. So again, we go back to basics, you try to understand these strong businesses, they're few of them, not a lot of them, and see if these businesses are run by strong management teams. They're given to us at right prices, and we see structural penetration growth in some of these categories.
So, stocks like Localiza (BVMF: RENT3), which is the largest car rental business where we see continuous penetration of car rental penetration in Brazil versus car ownership, driven by higher cost of financing, higher car cost.
We own now a business in South Africa called Bid Corp (JSE: BID), which is a large global food servicing business and they're benefited from reopening, but they're gaining market share globally in the food services business.
We own copper companies. They're listed in US and Canada, but they're largely emerging market, standalone copper companies with assets in Panama, Peru, Chile, Zambia. So, there are very specific opportunities where companies are very strong, even in volatile environment. And what we want to make sure that we buy them at the right price? We put the right country risk premium, we put the right volatility risk premium, and then if we can buy these businesses, I think they can still add a lot of value to our franchise.
LW: How do emerging markets perform in a US-led recession?
Goel: If you see a lot of other taper tantrums, quantitative tightening periods, if you see a emerging market where the FX reserve is low, the import cover is low, the current account deficits are high. Obviously these are the periods where you will see higher and higher volatility, and higher impact on currencies and economies and flows out of emerging markets. But the situation, as I explained earlier, it's slightly different this time. A lot of emerging markets have current account deficits, which are better than versus their history.
If you look at Brazil, South Africa, India, Indonesia, current accounts are better. They're still in negative in some places, they're slightly positive in some places, but they're much better versus their history, which means the financial health, the external balance of these countries are much better versus what it has been.
The Forex reserves are, in some places, in better situation, the rates and the inflation environment is much better than what it has been in their history. So, I think if I see where a lot of emerging markets stands today in their financial health, both their internal position as well as their external position, I think the fragility and the volatility is much lower versus their history.
So, I think in a typical US-led recession where you will see a massive outflow of emerging markets, so they have to raise rates, they have to stop growth, and they have to chew this volatility. I think emerging markets are better placed.
