Best-performing companies can be found in EMs: Goldman Sachs

Despite the heightened geopolitical tension and fallout surrounding Russia this year, emerging markets are the home to some of the best-performing companies in the world.

At least that’s the view of Basak Yavuz, co-head of Emerging Markets Equities within Goldman Sachs’ asset management division who reminds investors that over the past 10 years, an average of 80% of the top companies have come from outside the US.

China & India

Despite regulatory volatility in China [in 2021], Yavuz also reminds investors that 50% of the best companies were from China.

Yavuz expects economic conditions in the middle kingdom, one of two emerging markets (along with India) she’s particularly optimistic about, to stabilise and potentially improve despite recent issues surrounding the property sector, covid-enforced lockdowns and increased regularity scrutiny on the tech sector.

"Macro and geopolitics will always be at the forefront [for EMs] and it can be very hard to predict… but investors can still seek to generate significant excess returns above the benchmark return by investing in sound businesses with a disciplined valuation framework," she noted.

Why EMs now?

Much of Yavuz’s robust outlook on EMs is underpinned by strong demographics.

For example, 86% of the world's millennials live in emerging markets and China alone has 400m.

She also reminds investors that the aggregate income of this cohort is expected to surpass that of the US in the coming decade.

China

Goldman Sachs expects China equities to continue to provide diversification benefit to investors and believes this economy is better positioned to weather the ongoing Fed rate-hike cycle, especially given the distinct macro backdrop and policy direction.

“The evolution of the pandemic and related restrictions will directly affect how quickly China’s 2H’22 growth stabilises,” Goldmans' notes.

“That said, a rebound in economy and capital markets should not be far away if COVID-19 conditions could gradually improve.”

The broker expects the regulatory cycle to turn more market friendly through 2022 with an end to the downward sequential earning revision for Chinese IT.

Goldmans' also expects the Ministry of Housing and Urban-Rural Development’s commitment to constructing 2.4m units of public rental housing this year, to cement a “soft-landing” for the sector, potentially keeping any financial contagion risks at bay.

India

Key themes Goldmans' expects to play out in India over the medium-to-long-term and potentially offer attractive investment opportunities include:

• Structural demographic trends: India has one of the youngest populations globally, which is likely to enter the upper-middle-income club in this decade.

• Domestic market consolidation: Having undergone a de-facto stress test on profitability in recent years, companies with strong fundamentals will continue gaining market share from both weaker companies and the informal sector in general.

• Growth in manufacturing: The government's boost to manufacturing—through corporate tax cuts and production linked incentives—could become a much bigger investment theme in the coming years.

• Increased digitalisation and internet adoption: According to Goldmans' estimates, nearly US$400bn of market capitalisation could be added from new IPOs over the next 2-3 years.

• Infrastructure outlay: The government plans to spend roughly US$1.4tn by 2025 on its national infrastructure pipeline to develop smart cities, industrial corridors, railways, roads, renewable power and affordable housing projects.

How to play China and India via ETFs

Here are two ETFs offering exposure to quality growth stocks in both China and India.

VanEck Vectors China New Economy ETF (ASX: CNEW): Seeks to provide investors with access to a portfolio of (120) of the most fundamentally sound companies with the best growth prospects in the consumer discretionary, consumer staples, healthcare, and technology sectors that are domiciled and listed in Mainland China.

The ETF aims to providing investment returns, before fees and other costs, which track the performance of CSI MarketGrader China New Economy Index.

• NAV: $6.87

• Net Assets: $104m

• Management fee: 0.95%

Source: VanEck

Source: VanEck

BetaShares India Quality ETF: ASX: IIND): Provides access to a diversified portfolio of the 30 highest quality Indian companies based on a combined ranking of the following key factors - high profitability, low leverage and high earnings stability. It gives tactical exposure to Indian equities.

• NAV: $10.43

• Net Assets: $74m

• Management fee: 0.80%

Source: BetaShares

Source: BetaShares