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Written by: Nick Niziolek, CFA | Calamos
- The Fed’s pivot and China’s stimulus measures give emerging markets beyond China more room for their own accommodative policies.
- Emerging markets—especially emerging Asia—can continue to benefit regardless of who wins the US Presidential election.
- Calamos Evolving World Growth Fund’s toolbox (equities, convertible securities, synthetic convertibles, and options) gives us more ways to seek growth while maintaining a favorable risk/reward profile.
- We’re bullish on small- and mid-cap opportunities in India. We’re also constructive on growing opportunities tied to Chinese consumers.
At Calamos, we believe there are opportunities in every environment for active managers who know where to look. In the emerging markets, India’s growth story and AI supply chains have provided strong tailwinds for many emerging market companies, and we believe those will continue.
Fed Pivot Gives Emerging Markets More Flexibility
But the opportunity set is broadening. With the Fed pivot, many emerging market countries also have more flexibility to begin their own easing cycles. Most of the headlines here in the US have focused on China’s more accommodative policy, but other emerging market central banks have also begun monetary easing cycles following the Fed pivot. We believe many ASEAN countries—including Thailand, the Philippines, and Indonesia—will benefit from waning inflationary pressures, easing monetary policy, and a recovery in the Chinese economy and outbound travel.
Republican or Democrat in the White House, Asia’s Emerging Markets Can Move Forward
Over recent months, our conversations with management teams in Asia have confirmed that many US and global businesses are delaying orders from Asian suppliers, given the uncertainty surrounding the US Presidential election. Still, many of these businesses are optimistic and expect a healthy bounce back in capital expenditures and orders once there is greater clarity around the election, regardless of who wins.
And on that note, we believe emerging markets will be able to navigate forward with either a Republican or Democrat in the White House. We believe a Democratic victory would be very bullish for emerging market risk assets, given the likelihood of maintaining a favorable status quo. We also believe concerns about a Republican victory are overstated for emerging Asia. Unlike 2016–2020, when the market may have been surprised that the President followed through on campaign promises about trade policy, the risk is well-telegraphed today. Moreover, although a further increase in tariffs would be painful for Asia, much of the supply chain reorientation is already underway, with direct US exports now accounting for less than 15% of China’s total exports, or 2.9% of GDP.
How Calamos Evolving World Growth Fund is Positioned
We’re using our expanded toolkit to pursue growth with favorable risk/reward. Our investment universe includes convertible securities and synthetic convertibles, which provide the opportunity for upside equity participation with potentially less exposure to the downside. As we discussed in our post, “Accessing China, Differently,” this flexibility allowed us to maintain risk-managed participation in China’s equity market ahead of the rally and also to ramp up participation quickly when we saw an attractive inflection point.
We’re favoring China’s consumer over commodity plays. Since it announced easing monetary policy and fiscal stimulus, China has been a focal point for investors. The next few weeks will be critical in understanding the scope of the stimulus measures. In the interim, we are encouraged by the initial economic data we’ve seen following the Golden Week holiday: Travel statistics are now comfortably above 2019 levels, consumer spending figures showed good growth, and even property-related activity surprised to the upside. Unlike prior stimulus cycles, we are less optimistic on traditional commodity-reliant economies/companies as we believe these stimulus packages will be more focused on the consumer and “made in China” beneficiaries.
We’re still bullish on India, with a smaller-cap tilt. India remains our favorite medium- and long-term opportunity within the emerging markets. In the near term, India’s equity market, which has enjoyed consensus overweight status, could experience some pressure as improved conditions across emerging markets prompt investors to redeploy India allocations. Thus far, the selling pressure seems heavier within the large-cap segment of the emerging market (e.g., large-cap banks and IT services). This makes sense to us, given that our peers tend to favor these larger companies, ADRs or passive ETFs invested in these names.
However, the true opportunity within India does not lie within the large-cap banks and IT services companies. Rather, the opportunity in India is in the small- and mid-cap companies in themes such as Indian real estate, the Indian consumer, and the realignment of global supply chains (reshoring and friendshoring).
As the emerging market opportunity set gets larger, we believe a smaller asset base gives CNWIX further advantages. India is one example of how our smaller asset base can give us a significant competitive advantage over peers who may struggle to build meaningful positions in India’s small and mid-cap opportunities. We believe the combination of our nimbleness and our broader toolbox was instrumental in our ability to pivot quickly as conditions in China changed.
In closing
Like the rest of the global economy, emerging markets are always changing. Yesterday’s winners will not be tomorrow’s. Guided by growth, we see tremendous value in our willingness to differ from our peers and our benchmark.
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