387. Can Asia and emerging markets keep winning?

0:00Hello and welcome to the investing on the Go podcast. Today we're going to be talking about Asia, Asia and global emerging markets and I'm joined by Patrick Garvin, the client portfolio manager for the Invesco Asian and Invesco global emerging markets fund. Patrick, thank you so much for joining us today. Thank you. Thanks for having me. Please note that the following interview took place just days before the US attack on Iran at the end of February 2026. Views may have changed. Now, Patrick, I mean, Asia and emerging markets has had a pretty good run in 2025. Can the strong returns continue this year as well? Yeah, no, it's great to be talking about the asset class with such a positive perspective. I think if we go back to what was the components that were driving the return last year, obviously, we enjoyed sort of quite a significant re-racing for Asia and emerging markets, but there was also quite a significant contribution from earnings growth as well, specifically given the AI driven up cycle in technology.

1:05So, looking forward into 2026, I think it's going to be more about that delivery of earnings going forward, and we've already seen quite significant upward revisions to consensus expectations for earnings per share growth, specifically given strength of growth in technology, but it was scope for that to broaden out as well into other sectors. But it certainly feels like moving into 2026, I think an active approach is certainly going to be warranted. But, I mean, also, this period of outperformance for Asia and EM, I think also we need to think about it on a relative basis as well, because the asset class is underperformed relative development markets for 10 to 15 years now. I mean, there's been discrete periods of outperformance. But there are signs that we may be reaching a bit more of an inflection point. So, look, we're in an environment where liquidity is likely to remain easy, by which, I mean, the central banks have been easing monetary policy, so they've been cutting interest rates.

2:09The dollar has also been weak, and that's been a help. We have China getting closer to the bottom of its cycle after a period of slower growth, and the authorities that are being much more constructive in the need to support the consumer and stabilize market support, the property market in particular. Well, let's go into those in a little bit more detail then. So, I mean, as you say, one of the things, I guess, which has changed in recent years is this weaker dollar now. I mean, for many years, we've had a stronger dollar, and obviously with the geopolitical situation, with the things which Trump has been doing, he seems to be happier for a weaker dollar. So, I mean, do you expect the dollar will continue to weaken and be this big tailwind for Asia and emerging markets, which it typically is, or can Asia and emerging markets perform regardless of what the dollar does? I think the first thing to say is we're not currency experts, but a softer dollar has historically been the tailwind for your masses, because it supports growth. It lowers

3:14real rates, so it makes it, you know, eases financial conditions, and we've seen funding costs for emerging market companies come down over the last couple of years. It's also supportive for commodity prices, and, you know, commodity, there is quite a high correlation between commodity prices and emerging market earnings per share, and it also attracts capital inflows from investors looking to seek higher returns outside of the US. But, you know, last year was a week year for the dollar, probably the weakest that we've seen since 1973 when the US left the gold standard, but when you look at the valuation metrics for the US dollar, it still appears pretty overvalued on most measures, whether that be by real effective exchange rates or on purchasing power parity. But this narrative around US exceptionalism has continues to be challenged, given the policy uncertainty coming out of the current administration, and that's only increasing the argument

4:16for investors to seek greater diversification. And while we get some mixed messaging from the US, it does feel like they would continue to prefer to have a week dollar. And so if the dollar stays assets should continue to benefit. Yeah, one of the big concerns which Asian investors have had is this Chinese property weakness, which has been persisting for a while. I mean, you mentioned there that we might be getting to the bottom of that. Is that fair to say? I mean, where are we in this big cycle? I mean, is China improving now? Is consumer confidence coming back? I think we're closer to the end of the downturn in the property cycle than the beginning. I think the first thing to say is the downturn has been partly engineered. Going back over 10 years, the authorities were clearly concerned about the build-up of financial risk within the system, particularly over leveraged private sector property developers, which saw them try to constrain

5:20the access to credit that these developers had with the three red lines that they announced in 2020-21. And that was a policy that they adhered to during the pandemic, which with hindsight, we can probably look back at and say perhaps was a policy mistake considering how that weighed on consumer sentiment. But what we've seen in the last 12, 24 months is there's been a change in direction of policy from the authorities that the leadership has now acknowledged the problem and have pledged to deal with it. And that's clearly resolved some confidence to the real estate sector. But what we've seen in the last 12 months is that prices has been gained rolled off. I think, you know, from their peak residential property prices in China are down 25 percent, more so in some of the smaller cities. And, you know, we look at new home sales last year, you know, they were down 10 percent roughly a year or a year on a square meter basis. And, you know, that's less than half the value in terms of transactions that there was at the peak.

6:25So it's a key risk that the authorities are keen to address. But I think it's still not a priority for Qi, who appears still to be prepared to let the market do its job in terms of resetting a reset to prices. You know, there's clearly a need to stabilize the situation. But I think he's prefers to just let the market clear naturally without major government intervention. Now, what does this mean for the consumer? Obviously, you know, household, the value of property accounts for, you know, roughly 70 percent of assets for urban households. But this big drawdown that we've seen in the property market hasn't created the financial crisis that we saw in the United States, for example, in the GFC. And that's because the property market in China is slightly different because there's much higher cash-down payment requirement for new houses. And there's also strict mortgage due diligence processes. And also what we've seen over the last, you know, since the pandemic is a steady build-up in

7:30savings. So, you know, China naturally, as a high savings rate, we've seen that increase even more, I think $10 trillion increase in savings deposits for Chinese households since 2020. So we feel that it's not a crisis of household balance sheets that an organic consumer recovery can come. But, you know, it's likely to be a gradual process. And we're not trying to set up portfolios to benefit from it. But there's clearly opportunity in Chinese consumer stocks at the moment given how deeply discounted valuations still are. And what are your thoughts on the geopolitics at the moment? I mean, do investors need to worry about China and Taiwan or further trade wars? Yes, the geopolitics is always very tricky to navigate. And I think the current environment is as tricky as it's been for a while. I think, you know, going back to what Mark Carney was saying, and Davos recently about, you know, this being this rupture in the world order.

8:33And it's, you know, and when we look at the equity risk premiums, when we look at valuations, I think it's the hardest thing to try and price well. And I think often, Mark, it's often react wildly to when geopolitics are in the headlines before settling back to understerved levels. When we look at the China Taiwan risk, I think there is a recent zibias here with happened in Russia with investors having seen them asset smart to zero. And I think we saw that being reflected in the valuation of Chinese equities, you know, three, four years ago when China was, you know, the consensus view was it was uninvestable. And that to us, you know, suggests that the geopolitics was being mispriced. Now, the risk of China Taiwan, you know, a complication so to speak happening there, I think has gone up slightly since the Russia invasion of Ukraine, but it's still a very low probability event. We're not dismissive of the risk.

9:37But we think it's still a very small tail end risk. And that relationship, the current relationship between China and Taiwan, I know she, President Xi obviously has this long term aim of reunification. but the status quo is acceptable as long as there's no agitation to file an independence by outside powers. More broadly speaking, looking at the China-US relationship, it appears that both Trump and President Xi are keen to put a floor under the relationship. They want that strategic stability. While they're looking to reduce dependence on each other, they need the trade close to continue to work. There's obviously this potential for a pro-grand bargain given the summit between the two powers in April. But what we've seen more recently on trade, just generally for the match drop, is unhelpful given the uncertainty. What is your preferred market at the moment, across global emerging markets?

10:40Yeah, we tend not to think about things that way with country positioning being more reflection of the opportunities that we're able to identify from the bottom up. But when we look at markets, say on like a price to book measure, we've seen quite significant re-ratings for a number of key markets within the universe. But there are still markets that are trading on pretty attractive valuations relative to their history and thinking those in the ASEAN region that stand to benefit from de-risking supply chains, where the scope for consumer recovery markets like Indonesia and Thailand, I know Indonesia at the moment certainly feels very contrary and given concerns about market standards that have been raised by the MSCI. But when we look at Indonesia from a top-down perspective, we feel that the fundamentals are stronger than valuations suggest and that the risk for recovery there. I think obviously we've talked about China. Specifically, China has certainly participated in the rally in

11:47broader Asia and emerging markets, I think. But that's from deeply discounted levels and not all areas have been lifted by the rising tide. So it's been very AI, robotics, tech-driven. There's still significant opportunity we feel in Chinese consumer stocks. And I suppose for our global emerging markets fund, Brazil would be the biggest overweight, a market that obviously benefits from rising commodity prices, where the scope for monetary policy to be eased with rates given inflation having been brought under control. It's an election year, so there's scope for some volatility around that, but also potential for a more market, referendum, the administration to come in. And it's a market, a deep and liquid market, where we can build a portfolio of highly differentiated ideas that don't all have the same driver. So yeah, there's a few there to consider. And you're not a fan of India yet, despite the fact it was one of the few markets which did quite poorly last year. And now they have signs and trade

12:51deals with the US and EU. What are your thoughts on that at the moment? Yeah, look, an underweight position in India does not necessarily reflect a negative view on the country or the economy from a top-down perspective. I think we have no track with the view that India is one of the best macro stories over a medium term in an Indian perspective. It's gone through a period of normalization after stronger growth. But macro indicators suggest fundamentals are pretty strong. The trade deals are interesting. I think it's not a very trade dependent economy, but the trade deals should help stabilize the currency, which was very weak last year. But yeah, it's a question of valuation. Valuations were already elevated, stretched in some cases, and trading in a big premium to where they have done historically. So there's been an element of catch-up by other markets within the universe, but also earnings momentum has been a bit more subdued. And expectations are still set too high,

13:56and in our opinion, it's a high bar for corporate to beat, which they need to do to support their already high valuations. And then finally, also, it's a market which has seen record volume of issuance, a lot of IPOs and recent years, and that also makes it harder for the market to perform well. As Asia become a proxy for AI with some of its big companies like TSMC, SK, INIC, Samsung, and the Chinese tech companies are all making up a very big part of the index now. And is there a danger for investors that they're doubling up on their US tech exposure with their Asian exposure as well? Yeah, you're always, tech has always, tech and internet has always been well represented in Asian indices. And so, yeah, you're getting sensitivity to the AI theme there, but I think it's slightly nuanced. I think while the US certainly has very, very

15:00innovative software and design, software design companies, Asia is, you know, long cemented its position as a leader in advanced manufacturing. So, it's the tech hardware that you're getting exposure to at the moment in Asia, you know, and whether that be in foundry or memory. And I guess it's the hardware which seems to be winning at the moment. Well, software, so you're in the right place. Yeah, there is a clear bottleneck in supply for things like memory chips and passive components that are going into these GPUs and it's being ordered by Nvidia. And, you know, what's driving that demand is obviously the, you know, the big hyper-scale is in the US. That's the likes of clouds, cloud services companies like Alphabet, like Google, Microsoft, Amazon, Meta. But you can look at the backlog of their orders for their cloud computing services at the moment. It's over one and a half trillion dollars that they are not yet

16:03able to fulfill. And that's not, they're not trying to build it, you know, build it and people will come. The customs are already demanding this product, which means that, you know, certainly in the near term, we can feel quite comfortable about the delivery of earnings. But those big, big Asian tech companies are also now trading slightly higher multiples. But they have significant experience of managing these cycles. And they've tended to, you know, have strong competitive modes. But, you know, we still need to be mindful that, you know, they are vulnerable to over-exuberance for their customers. So there is potential for a demand disappointment at some point. So we need to be mindful about that and quite disciplined in our approach to valuations. Given the strength that we've seen as these stocks, we've been naturally chipping away at the profits that we've made from them. Very good. I mean, as you said, you are bottom-up stockpickers.

17:03So what are some of the most exciting ideas you have in the portfolios at the moment? Yeah, well, obviously, the ones that have done well are those that have benefited from, you know, strong demand and constraints apply, be that in memory or in commodities like copper. But they're obviously feeling a little bit more mature. You know, we tend to take a be-contrarian at the point of purchase when we're looking for new ideas. So look at what under-performed last year, I think quality as a factor was something that was clearly out of favor. I think how you define quality is open to debate. But, you know, it's certainly, you know, there's been some more interesting ideas in consumer staples in healthcare, IT services and leisure. The real opportunity is where we have conviction that, you know, investor sentiment has really become disconnected from fundamental. So, for example, if we're

18:04looking at Chinese consumer companies, you have a company like China Resources Beer, which is one of China's leading brewers, is now trading on a price to earn these multiples of around 13 times, which is the same as China Shenwa, which is China's largest coal miner. So, this is one of China's most resilient consumer names, strong fundamentals. There's been a big derating to evaluations and close to multi-year lows. Yes, this concerns about demand for beer and, you know, young people drinking less. But, you know, China Resources Beer has also been, you know, growing it's been higher-end beer volumes, with this joint venture with Heineken, in particular, being very successful at a spread much higher margin product. And, you know, even on the mid-tier products, we're seeing decent growth coming through there. So, that reinforces our conviction in the structural story further out. And, you know, you've got strong management in place,

19:08and a strong commitment to delivering capital to shareholders in terms of dividends and buybacks that we also like. It's not the only one. I think, you know, there's another one, for example, H12, which is a hotel management group, you know, a market leader where there's consolidation in the industry. But, again, you know, it's trading on a pretty attractive valuation level. And, you know, they have a clear shareholder return plan that we like as well. So, yeah, Chinese consumer certainly offering up some interesting opportunities at the moment. Very interesting. Well, thank you very much, Patrick, for giving us an insight into the way you think. And, thank you for joining us today. No, thanks for having me. And, if you'd like to learn more about the Invesco Asian or the Invesco Global Emerging Markets Fund, please do visit funcamber.com. And, thank you so much for listening. And, of course, if you haven't already, please do subscribe to the podcast to get all the episodes in the future.

20:08Thank you so much. Please remember, we've been discussing individual companies to bring investing to life for you. It's not a recommendation to buy or sell. The fund may or may not still hold these companies at the time of listening. Elite ratings are based on funcaliber's research methodology and are the opinion of funcaliber's research team only.