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Home Capital Goldman Sachs Asset Management: Investment themes 2020

Emerging markets and Japan equities becoming compelling

Luke Barrs
Luke Barrs • 4 min read
Emerging markets and Japan equities becoming compelling
(Jan 31): Despite 2020 looking like a year that will deliver slower growth, we expect to see a continuation of positive earnings next year, which should continue to drive performance in equities. Short-term periods of volatility remain likely, triggered b
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(Jan 31): Despite 2020 looking like a year that will deliver slower growth, we expect to see a continuation of positive earnings next year, which should continue to drive performance in equities. Short-term periods of volatility remain likely, triggered by geopolitical risks such as flareups in the US-China trade dispute, but we are constructive on equities overall and find opportunities in Emerging Markets and Japan particularly compelling.

Geopolitical uncertainty has been elevated for the last few years, and 2020, with ongoing trade re-alignment across the world and a US presidential election, will be no different. Investors need to be mindful of these shortterm risks and able to navigate around those that are most exposed.

However, we believe equity valuations remain reasonable. For those companies that are aligned to key secular growth trends, there remains significant long-term potential. In particular, those aligned to three, interlinked mega trends:

• First, the exponential acceleration of tech innovation and disruption.

• Second, socio-demographic shifts such as the economic empowerment of women globally and the rise of the millennial consumer.

• Third, environmental sustainability.

For example, we believe one third of US-listed companies are highly vulnerable to tech disruption and have no clear path to growth. Some sectors clearly find themselves at the sharp end of this challenge: traditional retailers without e-commerce platforms or auto companies without well-developed electric vehicle strategies will face major challenges in the year ahead. Those on the right side of technological disruption and growth are, however, poised to benefit.

The spending power of millennials is the largest of any generational group in the world and, as digital natives who are placing greater value on experiences over physical goods, the demands and consumer preferences of this cohort are catalysts for change. A similar demographic spending shift will be driven by the greater empowerment of women, with the global consumption power of women already at around US$40 trillion ($54 trillion).

Global movement towards greater gender equality, a growing number of females in the workplace and in higher-paid roles, and tech developments such as e-payment systems, which have given women in some parts of the world greater access to finance, all contribute towards long-term changes in spending patterns.

A key component of the future success of companies — and ultimately their valuations — will be the ability to tailor products, services and experiences to the requirements of women and younger generations.

One such requirement — particularly for the millennial generation and younger — is that businesses, their products, services and supply chains, are more environmentally sustainable. Over the longer term, those that fall behind their peers in terms of their green credentials will lose their licence to operate.

Companies are being mandated to disclose their environmental impact, as are the asset owners and pension funds that ultimately invest in them. Whilst different sectors will be judged on varying criteria relative to separate benchmarks, being perceived as an environmental laggard will ultimately result in a higher cost of capital, restricted access to funding from institutions and a loss of consumer confidence. Furthermore, those companies that can deliver the necessary solutions to help drive the transition to a lower carbon economy should benefit from secular demand tailwinds.

Despite the low-growth outlook for markets, we remain convinced that there are pockets of real value in public equity markets and the opportunity to generate significant alpha. A huge amount of capital has been directed to private markets — particularly early stage and VC capital — and this has created some concerning dislocations in valuations. By contrast, valuations in public markets appear more appealing, particularly when investors are prepared to search for opportunities in small- or mid-cap companies or increase their allocations to emerging markets.

Luke Barrs is EMEA head of Fundamental Equity Client Portfolio Management Barrs: Auto companies without well-developed electric vehicle strategies will face major challenges in the year ahead

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