Excitement around emerging market small-cap stocks

Alastair Reynolds, portfolio manager at Martin Currie, said they expect individual emerging market countries and sectors to display divergent paths in 2023, as has been the case in 2022.

Commenting on the emerging markets outlook in 2023, he said monetary policy would drive markets and volatility.

“It will be most obvious in terms of monetary policy with Brazil, for example, being about 12 months ahead of developed countries in its interest rate cycle,” he said.

“Brazil should soon be exiting from peak interest rates while other countries may see continued rate rises into 2023.”

India looks set to deliver the strongest growth amongst the large economies, fuelled by strong domestic demand.

China, too, should see a recovery in domestic growth, which any loosening of its zero-COVID policy could enhance.

Technology-focused economies such as Korea and Taiwan are expected to see earnings decline as technology supply chains enter a de-stocking period.

Despite a wide variance in individual performance, share prices have responded rationally to significant changes in investment conditions at country and sector levels.

“We will enter 2023 with emerging market stocks trading on close to 10x their price-earnings (P/E) ratios – well below the average of the past decade,” he said.

“It reflects expectations of slowing global growth as the effects of higher interest rates start to weigh on consumption.”

Corporate earnings growth is likely to be lower overall in 2023, following a strong recovery from the pandemic in 2021 and 2022, as the commodity boom this year is unlikely to be repeated.

“Our portfolio positioning has remained broadly unchanged,” Reynolds said.

“We continue to find attractive investment opportunities across a broad range of countries and industries.”

With an investment horizon focusing on the longer term, they remain excited by the powerful combination of technology adoption, urbanization, and services sector growth.

“As we enter 2023, we are more excited about opportunities within the small-cap asset class than we have been in more than a decade,” he said.

The economy and monetary and fiscal policy are changing at a time when small-cap stocks look inexpensive on both an absolute and relative basis.

“Following more than 12 years of significant underperformance relative to large caps, we believe small caps are positioned for a long-term secular period of outperformance,” Reynolds said.


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