Funds that focus on emerging markets must use the next five years to ensure ESG is at the centre of investment philosophies, especially since the biggest environmental and social challenges are located in the countries they invest in, according to John Malloy, co-head of emerging and frontier markets at RWC Partners.
“On a global scale, emerging and frontier markets account for the largest share of the world’s population, land and mineral resources,” Malloy said in a note.
“They are the drivers of global growth and consumption. Sustainability is a function of their development, and it is therefore essential to promote responsible business practices, enforce human rights and environmental protection.”
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He added there are high impact markets where a minor change can have major global consequences.
“Stopping deforestation in Brazil, reducing emissions in China, eliminating poverty in India or finding a solution to water scarcity in Africa, for example, could change the entire planet. ESG considerations are vital when investing in developing countries, and if the next five years are to be the years of emerging and frontier markets, they will also be the years of ESG,” he said.
Commodities and the energy transition
The themes targeted by RWC’s emerging and frontier markets team include technology disruption, financial inclusion, new auto tech, health and fitness, infrastructure development, education and sustainable energy.
James Johnstone, who runs the RWC Next Generation Emerging Markets Equity Fund, particularly has a positive outlook for emerging market commodities. Policy shifts on infrastructure spending in the US, as well as in China, are likely to increase demand for commodities, especially those needed for energy transition.
“One area we are particularly positive on now is metals, which enjoyed a strong period of performance throughout the latter half of 2020, with gold, silver and copper all significantly up,” Johnstone said.
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In terms of geographical exposure, the team is positive on opportunities across Asia, Europe and South America, with valuations across emerging markets looking attractive and at relative lows compared to developed markets.
“In Asia, China, South Korea and Taiwan should see a continued economic rebound led by export growth and consumption,” Malloy said.
“In Latin America, Brazil’s structural reforms will likely aid the country’s fiscal dynamics, while the country’s PMIs remain expansionary. We also expect Russia will benefit from a higher and more stable oil price as it remains well-supported as demand recovers amid curtailed supply.”
