The Next Chapter in Emerging Markets Investing | Marshall Stocker, Co-Head of Emerging Markets, Morgan Stanley
Aug 24, 2023
17:18
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Marshall Stocker, co-Head of Emerging Markets at Morgan Stanley, discusses the importance of country selection in generating excess returns, highlights investment opportunities in Greece, examines the risks in South Africa and India, debates the possibility of a US debt downgrade, and shares insights on China's equity market and potential economic stimulus.
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Quick takeaways
Country selection has a greater impact on excess returns than company selection in emerging markets investing.
Investing in countries undergoing institutional transformation or undervalued by the market can offer excess returns in fixed income or equities.
Deep dives
Key Point 1: Investing in emerging markets relies heavily on country selection
According to 50 years of data, approximately 80% of excess returns in emerging markets investing are determined by which country is chosen, rather than specific companies or sectors. This means that country-level analysis is more crucial than individual stock selection. For example, Russian equities collectively experienced significant losses, demonstrating that even skilled stock selectors would have suffered if they had ignored the country-level analysis. Similarly, in the case of China, getting the country allocation correct is deemed more important than selecting specific stocks.
Key Point 2: Institutional change and undervalued institutions drive investment decisions
In selecting countries for investments in fixed income or equities, the emergence of institutional change is a key consideration. Countries that are undergoing institutional transformation, such as improvements in the rule of law and regulatory environment, tend to offer excess returns. On the other hand, investing in countries where institutional value is not adequately recognized by the market can present opportunities. For instance, the Republic of Georgia boasts strong economic institutions but remains overlooked, leading to inexpensive yet fast-growing assets.
Key Point 3: Overweight on Greece and underweight on countries with deteriorating institutions
Greece, often neglected since its financial crisis, is seen as a significant investment opportunity due to its potential upgrade to an investment-grade country. With a reformist government focused on reducing the size of government, privatizing industries, and improving the regulatory environment, Greece is expected to deliver high earnings growth. Moreover, the Greek stock market has witnessed substantial returns with only a modest multiple expansion, suggesting further valuation expansion potential. Conversely, countries experiencing a decline in economic freedom, such as South Africa, are avoided. Despite the improving institutions under the Modi government, India is underweighted due to concerns about the fragility of its stock market in the absence of continued economic liberalization.
Marshall Stocker, co-Head of Emerging Markets at Morgan Stanley, shares his insight why country selection has a greater effect on excess returns than company selection, and shares his view on investment opportunities and challenges in China, Greece, India, South Africa, and other countries. Filmed at Camp Kotok in August 2023.
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Timecodes:
(00:00) Introduction
(00:26) Country Allocation Is Greater Source of Excess Returns Than Company Selection
(03:55) Greatest Country Overweight: Greece
(07:32) Underweight South Africa and India
(08:33) Can Governments Default On Debt Denominated In Currencies They Can Print? The Answer May Surprise You!
(10:54) Could The U.S. Ever Have An "Emerging Market Debt Crisis"?
(12:31) Chinese Equities
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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