Impact Blog

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Gary Greenberg, Portfolio Manager, Hermes Investment Management, Calvert Sub-Adviser

      London - With the MSCI Emerging Markets Index up 32.53% year-to-date through the end of November, emerging markets have been the best-performing region so far this year, and we believe this rally still has legs. In a world of overvalued assets due to years of quantitative easing, we believe emerging-market equities is one of the few fairly valued sectors left. 1

      The steady outlook for the global economy, bolstered by non-inflationary recoveries in the U.S. and Europe, should support ongoing growth in emerging markets. Local emerging-market economies themselves are benefiting from low inflation, low volatility and strong earnings growth across many regions.

      By our estimate, emerging markets are in the first 18 months of a recovery, which started in the middle of 2016 after a four-year bear market. Historically, most emerging-market rallies tend to last three to four years. Looked at on a 3-year rolling basis, which represents a typical market cycle, emerging markets appear to be coming out of an extended period of underperformance relative to U.S. equities, as the chart below illustrates.

      Calvert Blog 12-13a

      As performance cycles tend to be multi-year in nature, we could still be on the early side of a recovery cycle.Globally, we believe interest rates will rise, and quantitative easing will taper off, but at this point, most emerging-market economies have higher foreign-currency reserves — and lower levels of debt (ex-China) — and can take this in their strides. Earnings growth in emerging markets has outpaced that of developed markets this year, supporting rising stock valuations. This trend is projected to continue in 2018, albeit at a slower pace.2

      Stronger Economies on the Rise

      Regionally, we think most emerging markets are well-positioned against foreign interest-rate increases and investor panics, although countries with weaker economies, like South Africa and Turkey, are more vulnerable. As investors, we want to be in economies that are stronger, less cyclical and less dependent on importing capital, such as those of China, India and Taiwan. These countries, with healthy current accounts and strong foreign exchange reserves, are in solid financial positions that provide a good growth environment for companies.

      China, for example, is impressive because of its focus on innovative technologies, and internet powerhouses like Alibaba and Tencent now dominate the Chinese landscape. With a network of 900 million social users, Tencent has a vastly under-monetized user base. India's growth is expected to reaccelerate in its new fiscal year; and Russia and Brazil are already seeing economic recoveries, which is being reflected in earnings estimates and the indexes themselves.

      Emerging Markets Driving Global GDP Growth

      Emerging markets have huge, diverse populations that wield significant purchasing power. As these economies continue to mature and modernize, we believe there is room for further growth as they "catch up" to more developed-market countries. Emerging-market economies now account for more than 75% of global growth in output and consumption, according to the International Monetary Fund (IMF).3 The IMF estimates this trend will continue for several years, per the chart below.

      Calvert Blog 12-13b

      Because their economies are still immature, emerging markets often react to geopolitical or economic events more strongly than developed markets, with panic or euphoria. As a result, attractive companies can become undervalued more quickly, creating opportunities for stock pickers.

      At Hermes, we spend a great deal of time on the ground in these countries and are very familiar with local customs, businesses and politics. We take advantage of market sell-offs to invest in great companies with good long-term prospects that may have been caught in what we believe is a temporary storm.

      In our view, emerging markets is a fairly valued sector that offers growth and upside potential for years to come.

      Bottom Line: We believe emerging markets still have room to run, supported by fair valuations, solid forecasted earnings growth, and a steady-growth global economy. There are good opportunities for stock pickers who know these markets well.