Emerging markets are no longer your 'grandpa's market'

As several emerging market economies are grappling with consequential elections, geopolitical uncertainty, and foreign exchange headwinds, UBS chief investment officer, Emerging Markets Americas Alejo Czerwonko joins Market Domination Overtime to discuss the evolution that has occurred in these markets.

Czerwonko emphasizes that emerging markets are "not your grandpa's emerging market" and have matured considerably. 30 years ago, Czerwonko says the emerging world was only 3% investment grade and now is over 50%. Back then, markets were also challenged by high levels of inflation, fiscal irresponsibility, and monetary policy dependence on executive power. Today, "all that has changed," Czerwonko argues.

There is particularly strong opportunity in fixed-income bonds, though they are not as strong as in the US. Latin American bonds are "ripe" with possibility, boasting "relatively high yields." Czerwonko also points to the many "very professionally run, healthy balance sheet companies" in the Asian tech sector.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This article was written by Gabriel Roy

Video transcript

It is not just the us inflation forces are at play in markets across the globe.

European Central Bank President Christine Lagarde, noting today at a panel in Sintra Portugal that she expects a bumpy road ahead for inflation across the Euro zone through the end of the year.

Beyond inflation, several emerging market economies are grappling with consequential elections, geopolitical uncertainty and FX headwinds in recent months.

Joining us now, Alejo CCO Cio emerging markets, America's at UB Ss.

Alejo, thanks for joining us on said, appreciate it.

Thank you for having me.

Oh I thought we would start with, you know, um investors that hear emerging markets, you've been actually selling those markets for a long time.

More more than 10 years.

How are they, how they change Alejo?

How are they different than say five years ago?

10 years ago, I would start by highlighting that emerging markets are not your grandpas emerging markets, they matured quite a bit, right?

Uh There's been an evolution of the asset class.

Let me give you an example.

30 years ago, the emerging world was 3% investment grade.

Today we're talking about over 50% investment grade.

30 years ago, the typical emerging market was chal challenged by very, very high levels of inflation.

Uh fiscal irresponsibility, irresponsibility, monetary policy, dependence on the executive power, all that has changed.

Uh inflation has come under control.

We've got inflation targeting regimes and independent central banks.

So this is a different asset class when it comes to investment returns.

They've been pretty good when it comes to bonds, fixed income.

They haven't been as good when compared to the United States, when it comes to equities, there are many reasons for that.

But I think it's important to recognize that when you look at the health of balance sheets in emerging markets, they're superior today at the sovereign level at the country level than many developed markets.

And even when it comes to different companies, you have very professionally run um healthy balance sheet companies out there in the emerging markets.

So Alejo who's best positioned at this point just in terms of growth that we could see given we have seen obviously an improving picture.

But when you square that with the opportunity versus some of the risk that's associated with high inflation, obviously not just a problem here for developed markets, but also for some of the emerging markets as well.

And then also the political uncertainty side of things as well.

Yes, I would say political uncertainty has grown just about everywhere, right?

Um You could even go as far as to conclude that there's more visibility in many emerging market elections today than there are in elections in a country like the United States, right?

So I think it's a global phenomenon concretely to your question on the opportunity.

If you're talking about bonds, you find attractive fixed income opportunities across regions.

Latin America is an area ripe for this opportunities.

You find relatively high yields that are not fully um uh justified by the relatively solid fundamentals, right?

Uh When it comes to equities, maybe that's the land of Asia Pacific, India is a secular area of growth that we favor technology in the emerging markets, is dominated by Asian markets.

Um consider the largest chip maker in the world based out of Taiwan, the largest memory chip producer in the world based out of South Korea.

So Taiwan and Korea are some of the markets that we favor in the middle of the Artificial Intelligence revolution.

You, you mentioned the election here as well.

I mean, obviously front and center, what are some possible ramifications or impacts our election could have on the emerging markets?

Absolutely.

Um When you consider the vastly different views of how the us should interact with the rest of the world, Trump vis A vis Biden, uh you can help to conclude that there are going to be consequences, right?

The Biden administration in a 2.0 version would be uh AAA globalist uh you know, working with allies to achieve geopolitical goals.

The Trump administration would be more focused on own tools, looking inwards, right?

And this will have an impact on the US relationship.

Vis a vis Mexico, China, Ukraine.

These are some of the main uh exponents, right?

In addition of course to the Middle East, um some winners, some losers.

Uh but overall, you know, there's simply every country in the world out there is looking at this race very, very closely because it will impact uh their own economies and their own political relationship with the largest economy in the world.

Two regions that you just mentioned before.

India and China and I bring that up just given the divergence that we're seeing in the performance of equities.

There is this the trend that you think can run for some time.

And what are the implications of that?

We think?

So now these are very, very different markets when it comes to the equity world.

Uh India is attractive from its secular growth perspective.

Uh demographics reforms, geopolitical suing state status.

Now you're paying hefty prices for it, right?

Uh India market wise is trading at over 21 sorry, almost 24 times price earnings ratio, which is, you know, expensive vis a vis on history, vis a vis other markets.

So there's a lot of good news price then we think the market can continue to perform thanks to earnings growth uh dynamics, you know, we're penciling in 15% earnings growth this year next year.

Uh So, so this is mostly a carry play based on earnings growth.

China.

On the other hand, is trading much cheaper.

There's a lot of bad news in, you know, Chinese equity valuation.

So you could get in some scenarios, a sharp re rating of Chinese equities uh and some other scenarios depending on geopolitical situations, domestic politics, domestic economic dynamics, a ad rating.

So you, you've got a broader range, I think of outcomes when it comes to to China.

All, Aleja.

Always great to have you.

Thanks so much for joining us here on set today.

We appreciate the time.