Saturday, October 1

What if 2022 is the ‘boom’ of emerging stock markets? In Spain, ESG investment continues on the crest of the wave

Especially in the squares of Southeast Asia, with China, Indonesia and Vietnam, as standard bearers. Faced with inflationary fears on Wall Street and with ESG criteria dominating capital markets such as Spain.

The prestigious iShares MSCI Emerging Markets ETF (EEM), the indicator of emerging markets par excellence, has issued a ruling. His latest prediction speaks of a 4% decline in the joint asset valuations that make up his composite index. Sensibly weighed down compared to the S&P 500, which will close the year with benefits of 26%. But 2022 is set to reverse this scenario. At least, in the engine room of JP Morgan AM; from where they hasten to anticipate that next will be the year of his resurrection. This is predicted by his global chief strategist, David Lebovitz, for whom hehe era of “exceptionalism” in American markets is nearing its end, while the Chinese economy could restore the investment enthusiasm that has left capital portfolios in the Asian giant upset. In a note to clients, JP Morgan’s team of international strategists, which serves as Investment Outlook 2022, suggests that assets in foreign markets could correct their deficit of the past decade next year compared to that of their rivals listed in Wall Street.

Lebovitz, speaking to Business Insider, takes for granted that the recovery from the Great Pandemic “is going to intensify its acceleration, until it becomes a global phenomenon” and that global GDP “will become on fire, with all the cylinders of its engine at full capacity.” It is the starting point of a diagnosis that also makes two other fundamental arguments. On the one hand, the particularly low expectations of earnings growth for 2022, which actually leaves a high margin of maneuver for investors. And secondly, because the valuations of international – non-American – assets are shockingly lower compared to their American counterparts. In addition to another perception that Lebovitz’s team calls into question: a market consensus that only gives them a 7% revaluation in 2022; in line with your average of the last twenty years, the analysts of this investment bank explain in the report.

Faced with this global outlook, JP Morgan does not exactly rule out a correction in the US stock markets, given that, in their opinion, the largest economy on the planet will not reach the cruising speed expected by the market. Reason that could precipitate the diversion of investment portfolios from the US to values ​​of international capital markets. “Next year will be one of significant development in foreign markets, with more than reasonable profits and valuations in certain regions.”, Also agrees David Kelly, global strategist of the firm in the study, because“ they offer an attractive combination of cyclical and growth fundamentals ”.

The economic or cyclical components are decisive in the post-Covid scenario, as they already were during the recession, in which the values ​​of companies with manufacturing or the provision of national services especially flourished, capable of meeting the spending needs of domestic consumption . In the same way that, With the gradual social lack of refinement, investors’ points of view were broadened towards other values ​​with global projection, writes Kelly, whose analysis -includes- had a special impact on European markets. Something that Lobovitz subscribes, for whom “more than half of the European MSCI index sustained its growth in 2021 in firms in sectors with special repercussions on the take-off of activity, such as energy, the manufacturing and materials sector, the industrial sector or the financial.

But the cyclical factor, Kelly recalls, also addresses essential aspects such as inflation. Hence, these same energy companies or the manufacturing of components and materials have been configured as the most sensitive to a price escalation that could lead to another one in interest rates that ends with the current phase of “extremely cheap financing”. To which is added the irruption of the sixth wave of coronavirus, that of the Omicron variant. But it will not go from being “a winter storm”, after which “months of more than remarkable dynamism will emerge.”

In this context, Southeast Asian markets will take over. “This is where the best investment opportunities will be,” sums up the JP Morgan report. Specifically, in the trading floors of Indonesia, Vietnam and China. To a greater extent than the sophisticated markets of the region (Australia, Hong-Kong, Japan, New Zealand and Singapore) and of the Europeans. In these three Asian economies, with growth averages above 5% between 2000 and 2019, they will return to the path of investment gains and economic expansion in 2022. The benefits of investment portfolios will depend on their progress. As well as the steps in digitization and green energy neutrality and electric vehicles in China, South Korea and Taiwan.

For Lebovitz, a substantial element of this bet is the manufacturing composition of the Southeast Asian economies. Now that demand is advancing solidly, despite logistical and commercial collapses, companies that produce must be rewarded and should be “the backwind of assets” in the capital markets. On China, Lobovitz appeals to “patience.” Do not forget that it is a command economy, he says, in which Evergrande and its probable bankruptcy has guided the designs of Beijing, whose government dictates fiscal and monetary objectives, but whose roadmap is the return, not declared or official, of GDP growth above 5%; after the slowdown in the second half of 2021. Kelly echoes that the stock market falls of at least 30% in 2011, 2015 and 2018 were followed by increases in six months of 28% on average. “Chinese stocks need to pass on to investors the reformist effects of each business cycle to take on the leadership role in emerging financial centers,” Kelly clarifies in the note.

Investment tensions in the US due to inflation

Morgan Stanley reviews the investor risks of the galloping inflation that has appeared in the US and that will force the Federal Reserve to decree three rate movements in 2022. Lisa Shalett, Chief Investment Officer (CIO) of Wealth Management at the bank of Investment notes that the tension in the bond market before the discount of an increase in the price of money has not yet translated into a correction of the “rich valuations” obtained by the securities under investment approaches with an inflation adjusted to the objective of the Fed for most of 2021. And that the Federal Reserve continues to link to the bottleneck of the logistics and trade crisis. Despite the fact that he has put the name of prolonged to the “transitory” with which he has described the escalation of his CPI in recent months. This differential between portfolios configured without inflation in sight, especially in the assets of large companies, and those that have already corrected the rise in prices and rate hikes, also based on activity indices such as the one set by sentiment of consumers and companies from the University of Michigan and that point to a deterioration of the situation in the short term. Due to the Covid variant and the jump in prices on an economy that, despite continuing at a good rate of growth and employment, will experience the collateral damage of the inflationary context.

Even so, Shalett, appeals to economic optimism, although not so much to the investor. As long as the double crunch lasts, energetic and logistical, which is inclined to classify it as eventual, although it lasts until the middle of the year 2022.
Booming Spanish capital market

Meanwhile, in the Spanish market, according to the KPMG CapCorp 2021 meeting, there is a phase of notable interest in Private Equity. With the arrival of a large number of international funds and their peaceful coexistence with national vehicles, which have increased competitiveness and, therefore, asset valuations. Although – they qualify – “many funds see the opportunity to gain a good upside by betting on the international growth of their investees”. What’s more, portfolio management has become a must and there is practically no fund that has not created a powerful ESG strategy in its investments. or in its investees. “There are bonanza times,” said José González-Aller, partner responsible for Private Equity at KPMG in Spain. For Jordi Alegre, Managing Partner of Miura Partners, “a few years ago, Spain was not on the radar of the great LP’s, but that has changed; to the point that there is a compensation effect due to the time in which they did not invest in Spain ”. Valuations have risen and there is more competition, but it is not a negative thing; quite the contrary, it is a climate that leads to improvement and sophistication, he clarifies.

Maite Ballester, managing director of Nexxus Iberia, pointed out that “there are purely regional or geographical strategies and others exclusively sectorial (in markets such as health care, food care, etc.); or by themes, with funds for social impact, energy saving or industrial transformation ”. And that, in turn, within Private Equity, “we are seeing a proliferation of solutions: secondary, hybrid, debt funds … Therefore, We are not only competing with traditional funds, but also with these new vehicles”. In his opinion, “the majority of investors worldwide are thinking of maintaining or increasing their presence in the product.”

Private Equity continues to give high returns and has become a must have if we compare it with equities. It is a sector that has shown that it is no longer just fashion, the historical series of profitability are there. The challenge, he explains, is to obtain LPs that are not only public entities, but also that large institutional investors also bet on the product. Because US pension funds and insurers invest 10% of their portfolio in private equity; in Europe around 5% and in Spain we do not reach 1%”.

Meanwhile, Natividad Sierra, Head of Investor Relations & ESG at Corpfin Capital, explained why investments have focused on ESG criteria and responsible investment policies that, more and more, have been interspersed in the funds. Sierra noted that, “in early 2000, LPs required you to exclude some sectors from your investment objective.” This requirement was only the beginning because, “for several years now, the trend towards sustainability has totally increased, hand in hand with the new European regulation.”

Hence, the funds must devote a lot of effort to developing an ESG policy in each of the investees, with medium / long-term action plans. “ESG issues are no longer a temporary fad to a structural change that is here to stay.” And all companies, from all sectors, must conform to the new regulation, he explains.
Diagnosis shared by Ramón Pueyo, partner responsible for Sustainability and Good Governance of KPMG in Spain. “It is precisely this regulation that makes companies and funds have to go one step further because, previously, only whoever wanted to develop their ESG policy; however, nowadays, it has become an obligation ”. According to Pueyo, “ESG criteria have ceased to be a temporary fad to become a structural change that is here to stay.”

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