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Emerging Markets Opportunities Amid Market Volatility
Global financial markets have been experiencing sharp drawdowns and extreme volatility. Although the catalysts may be unique—COVID-19 and an oil price war between Saudi Arabia and Russia—the occurrence of such dramatic turns in global financial market and economic conditions is not. We believe a narrow focus on sustainability helps account for such unpredictable periods. While we are not immune to these gyrations, we believe we are also in a period of opportunity. We continue searching for companies with sustainable competitive advantages or unique access to growth—characteristics that enable companies to persist through volatility, succeed after the dust settles, and generate alpha over the long term.
Long term, we believe COVID-19 could intensify and accelerate several pre-existing trends. Spurred by the US-China trade war, the realignment of global supply chains will likely pick up momentum. COVID-19 is further highlighting the heavy dependence of global supply chains on China and the limited benefits of recent capacity shifting to other parts of Asia. As viable alternatives become more apparent, the process will present varied investment opportunities in both geography and timing.
Chinese companies will likely accelerate investments in technologies such as lasers and robotics, improving productivity and reducing labor intensity. These capital investments will have significant implications for both manufacturers making the investments as well as for companies developing, producing and supplying components for the new technologies. In addition, COVID-19-induced social distancing will likely have a lasting impact on some areas of consumer behavior, including online shopping, telecommuting and media consumption.
Turning to the oil price war, the steep drop in oil prices and a COVID-19 induced decrease in global demand are weighing on Russia’s economy, currency and financial markets. However, many Russian companies have made meaningful improvements in corporate governance and financial and social sustainability in recent years. We believe there are attractive investing candidates in Russia with strong financial and operational fundamentals and the types of competitive advantages or access to growth that continue to make them attractive long-term opportunities.
The exercise of predicting market movements in the short term is futile. However, history is full of examples of market inflection points occurring not when “victory” is declared—in this case when COVID-19 has run its course or a medical treatment is distributed around the globe—but when markets deem policy responses adequate and credible to arrest fears of the most negative outcomes. As the markets continue searching for this point, we believe it is critical to remain committed to a process that helps identify companies likely to weather the volatility and downturn, ultimately generating sustainable earnings and long-term alpha.
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