The Power of Experience In Emerging Markets

Matthews has been investing in emerging markets for more than three decades. In that time we have seen these markets evolve and develop, in some cases significantly. Emerging markets is also an asset class that has traditionally seen investors flock in and flock out as one market outperforms and under-performs the other. And while many emerging markets, their central banks, sectors and companies have advanced leaps and bounds over the years this approach still survives in some areas today.

At Matthews, we look at things differently. Founder Paul Matthews believed the only way to capture the strength and growth of fast developing markets was to invest through cycles in quality companies with sound business models. Patiently positioning for long-term returns empowers the investor to leverage the higher growth often inherent in emerging markets while managing the inherent volatility. It’s an approach that requires us to roll up our sleeves and be active. Active on all fronts. Active in doing our research, active in visiting companies, active in engaging with clients and active in being mindful of macro and external headwinds and tailwinds. 

If we look at China, for example, there’s an entire mainland stock market of domestic companies that many investors consider uninvestable today. We keep an open mind and do our research. We’re on the ground meeting with companies, understanding the regulatory landscape and evaluating the opportunities and risks that come with exposure to businesses that could be trail blazers in the future. Then there are frontier markets, like Vietnam, which potentially offer huge growth opportunities but again they require in-depth research and conviction. Even a market like India, that has demonstrated robust growth and returns in recent years has inherent challenges and risks and requires expertise and experience to navigate. This is where our active approach is called for. 

“Our active but patient mindset has been the North Star across our strategies since our founding and it remains key for us today.”

Over the years, we have seen first-hand how emerging markets have evolved and the headwinds they have faced. The Asian Financial Crisis in 1997 was one of the biggest challenges. It upended markets and left some central banks, economies and many companies in ruins. By holding firm on our investment philosophy and risk management principles and executing on our mandate of growth with stability we navigated the crisis. We also gained a deeper understanding of emerging markets as a result, as we did during other events, like the 2003 SARS crisis, the 2007 bursting of China’s equity bubble, the Global Financial Crisis of 2008-2009 and, more recently, the COVID pandemic and the economic challenges that resulted from it.  

Patience and vigilance

Our active but patient mindset has been the North Star across our strategies since our founding and it remains key for us today. Emerging markets came out of the pandemic in robust shape. Many raised interest rates ahead of the Federal Reserve and didn’t deplete their resources with stimulus spending. Many emerging markets are still in recovery mode but their path to stronger growth and the investment opportunities that come with it are becoming clearer. 

EM Equities—Ready To Re-Emerge?

That’s not to say there aren’t challenges. We live in a world markedly different to the pre-pandemic world and higher interest rates is one major difference. Higher rates are on obstacle for companies to navigate and we must be vigilant in monitoring for negative impacts even though we may be entering an interest-rate cutting cycle. Geopolitics can be another broad headwind to growth or source of volatility in emerging markets. Latterly, geopolitical tensions and negative sentiment have most affected China but we accept this a variable that is baked into the investment landscape. When emerging markets meet developed markets, cooperation and tension can manifest themselves in equal measure. Investing in emerging markets requires patience, perspective and persistence. Below are four key pillars of our approach that aid us in our mission.   

Collaboration

Our investment team comprises diversity in experience and expertise. Our portfolio managers have extensive knowledge across emerging markets globally, from Latin America to the Middle East, Eastern Europe and Asia, and within specific geographies and sectors. They also have an array of skill sets. As well as experience in portfolio management and capital and securities markets, some of our managers have worked for regulators, governments and global economic organizations. Emerging markets are interconnected, so cross-collaboration between portfolio managers is essential. As well as sharing knowledge at corporate and sector levels, we share ideas, viewpoints and perspectives which can be crucial for the positioning and exposure of strategies and for enhancing long-term visibility in markets.

Company research and engagement

Our investment team spends considerable time face to face with company executives, regulators and other corporate stakeholders. Their mission is to uncover what makes good companies tick and what the variables are that may affect their success. Meeting and assessing company management is an essential part of our investment process. We believe on-the-ground insights are often undervalued by investors. It isn't enough to run programs and quantitative analysis to examining company fundamentals. Qualitative information derived from corporate engagement can be a key driver of alpha in portfolios.

Fundamental stock-picking and risk control

In tandem with research and corporate engagement is our fundamental analysis and stockpicking approach. Experience has taught us that investing in emerging markets requires the ability to identify good companies at good prices, as well as the ability to look past the noise of the marketplace and maintain a long-term horizon. This helps us to build resilient and differentiated portfolios. 
And within our portfolios we have embedded risk management protocols which measure, monitor and revise where necessary the concentration of our holdings, and their individual and collective risk characteristics. Having invested in some of the largest constituents within the emerging markets universe for decades, we have navigated market cycles by building tightly-managed portfolios that follow a disciplined fundamental investment process.

Partnering with clients

Active investment management also means actively partnering with clients. Investing in any asset class has two important dimensions. It is not simply about the potential returns a company or a portfolio can generate; it is also about what an investor’s needs are. We focus on listening to what clients require and then creating investment solutions that address those concerns. The second dimension is that investing isn’t a single action, it’s a journey. Exposures needs to be monitored and increased, decreased or removed where necessary and they also need to be considered from an investor portfolio perspective. We place emphasis on being a reliable partner to our clients, on working with them and going the extra mile servicing their needs.

Today’s markets can be challenging to decipher. But at Matthews we believe that our experience, expertise, collaborative approach and patient long-term view can provide the gateway to sustainable returns for investors looking to broaden their portfolios and diversify their exposure.