Key Takeaways
- • Matthews executive chairman Mark Headley says allocators' rush into AI-linked emerging market equities has left sectors such as financials overlooked, creating opportunities outside the crowded AI trade.
- • Headley describes the AI trade in EM as partly driven by the overrepresentation of Asian chip companies in EM indices, and says AI plays in Asia have corrected sharply enough to look like value plays.
- • Headley has observed capitulation selling in China, Indonesia and Brazil, but argues against investing in Brazil and Indonesia until governance, fiscal management and government-backed growth reforms emerge.
- • Headley expects mid-teen earnings growth from EM equities, a slow path he says is acceptable, and says that P/E multiples are "generally very reasonable."
- • Headley says investors need "patience and a strong stomach," and that large allocators are slowly shifting capital overseas amid strong EM returns and U.S. large-cap tech concentration.
Summary
As allocators continue to pour capital into AI-related companies in emerging markets, Matthews executive chairman Mark Headley argues that other sectors, including financials, are being overlooked and offer opportunities in emerging and frontier markets. According to Headley, speaking to Institutional Investor, "People obviously want and will pay for AI — but the build out level is nuts," and "whole sectors like financials are being ignored." The AI trade in emerging markets is driven in part by the overrepresentation of chip companies in Asia and in EM indices.
Headley also noted that the AI plays in Asia have corrected massively, so "even they can be seen as value plays at this point." He has observed "capitulation selling in China, Indonesia and Brazil," but he argues against investing in Brazil and Indonesia until those markets deliver serious corporate governance and fiscal management reforms, along with real government-backed growth initiatives. He described the sell-off in those markets as "reminiscent of some of the last 30 years' ugliest moments."
Headley acknowledged that EM equity growth is "not very exciting" and will not deliver quick alpha, but he considers that acceptable. He said he dislikes sharp rallies such as those seen in March and April, which "almost never last," and is instead hoping for mid-teen earnings growth. With P/E multiples "generally very reasonable," he said even a modest improvement in earnings could fuel a recovery.
Headley also said active managers have been pressured "to constantly stay close to their benchmarks," which he says inhibits long-term decision-making. Strong returns and the overconcentration of large-cap tech stocks in the U.S. have led large allocators to gradually migrate capital into emerging markets, which may generate strong returns over time. Previously, a Matthews portfolio manager told Institutional Investor that "emerging markets are significantly under-owned" and that "these regions have hundreds of underresearched and misunderstood companies."
Headley also noted that the AI plays in Asia have corrected massively, so "even they can be seen as value plays at this point." He has observed "capitulation selling in China, Indonesia and Brazil," but he argues against investing in Brazil and Indonesia until those markets deliver serious corporate governance and fiscal management reforms, along with real government-backed growth initiatives. He described the sell-off in those markets as "reminiscent of some of the last 30 years' ugliest moments."
Headley acknowledged that EM equity growth is "not very exciting" and will not deliver quick alpha, but he considers that acceptable. He said he dislikes sharp rallies such as those seen in March and April, which "almost never last," and is instead hoping for mid-teen earnings growth. With P/E multiples "generally very reasonable," he said even a modest improvement in earnings could fuel a recovery.
Headley also said active managers have been pressured "to constantly stay close to their benchmarks," which he says inhibits long-term decision-making. Strong returns and the overconcentration of large-cap tech stocks in the U.S. have led large allocators to gradually migrate capital into emerging markets, which may generate strong returns over time. Previously, a Matthews portfolio manager told Institutional Investor that "emerging markets are significantly under-owned" and that "these regions have hundreds of underresearched and misunderstood companies."
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