GEM Outlook for 2022

Aubrey Global Emerging Markets Fund Manager, Rob Brewis, shares his 2022 emerging market outlook.

When it comes to the “big” emerging markets, and by that we mean big by both population and potential, it has been a rather binary year in 2021 so far.  China down 20% and India up 20% to the end of November.  It would be easy to say that 2022 will be another reversal of fortunes, a little like 2021 was a reversal of 2020. We have some sympathy with that view.

China had such a “good” early covid experience in 2020, both controlling the pandemic internally and enjoying an export boom in all the things we needed while stuck at home.  . It was always going to be a hard act to follow. And so it proved.  The regulatory clampdown  on the sectors that had become the poster children of both Chinese innovation and its stock market clearly undermined some business models and adversely affected sentiment towards others.  A tight noose on economic policy continued, as the CCP tried hard to curtail unwanted leverage in local governments and property developers.  And finally, valuations were elevated, especially in those more technology orientated sectors.

Looking into 2022 it is easy to make the case that all these headwinds will at least subside, if not reverse.  Comparisons will be easier for a start.  The regulatory issues might not be going away, but it is hard to see them having anything like the impact of the past year.  Any proclamations or fines these days are generally met with a shrug.  The indications are that Beijing will be easing policy at the margin in 2022, and valuations have corrected a great deal and look highly attractive in most cases.

India, in contrast, stuttered with the first covid wave in 2020 but soon realised the futility of lockdowns in a country at India’s stage of development.  The second wave was brutal from an immediate human point of view, but letting it run has perhaps saved many more lives as natural immunity has now kicked in.  Since then, the economy has roared back, as if making up for lost time. More likely, it is getting back to a higher growth setting which has been made possible by the significant, and perhaps underappreciated, strides the country has made in recent years.

There are a multitude of reasons why we believe this really is India’s time, and these have been discussed before, and will not be regurgitated here (much).  These are mostly structural (better infrastructure, reduced corruption, lower inflation, urbanisation, financial inclusion and technology, booming manufacturing…), but are also cyclical (residential property upturn, low corporate leverage, potential investment cycle).  We could go on.  But there is no doubt this has not gone unnoticed by the stock market, as reflected in this year’s performance, and valuations are stretched, even by Indian standards.

We have reduced some exposure, but are reluctant to leave the dancefloor given the aforementioned potential.  Growth is most likely to exceed expectations.   It is also encouraging to see the field is broadening for us, with the listing of several new businesses in potentially attractive consumer focussed areas:  Zomato (food delivery), Nykaa (e-commerce), Policy Bazaar (insurance comparison), PayTM (payments) to name a few.

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