“The stress in the banking systems of emerging markets was manageable despite the credit moratoria and government support policies for borrowers in many emerging markets,” said Ness.
Much of the bullish emerging markets narrative comes from higher value earnings he believes were triggered by the COVID-19 pandemic. It accelerated technological change and innovation in these economies and resulted in higher free cash flow generation compared to developed countries. This has contributed to deleveraging on balance sheets, dividends and share buybacks, as well as increased motivation for increased governance standards and capital discipline in companies.
Citing data from Bloomberg, he said the annualized total returns for the MSCI Emerging Markets Index have outperformed the UK FTSE, S&P 500 and TOPIX benchmarks over the past 20 years. An internal analysis also found that emerging market earnings over a five-year period are the main driver of total return in the MSCI EM Index.
And while emerging market stocks seem undervalued compared to -36% value for money US stocks – a two-decade low – Ness noted that US earnings multiples are at a two-decade high . The real narrative of better cash flows, stronger balance sheets, improved capital efficiency and less cyclicality between emerging markets is likely to ultimately manifest itself in a 2021 earnings rebound from a low 2020 base, he argued.
“Many of the issues we’ve been investing in for a while are likely to remain relevant in a post-COVID-19 world, and some will even accelerate as a result of the pandemic,” Ness said. At the start of the pandemic crisis, many EM companies had stronger balance sheets than their counterparts in developed countries, including some that have been criticized for having high cash balances that, in hindsight, seem a little prudent.