Bullish outlook intact for emerging-market stocks

Bullish outlook intact for emerging-market stocks

Q2 2021 Putnam Emerging Markets Equity Fund Q&A

  • The fund outperformed for the quarter as well as the 1-, 3-, 5-, 10-year, and life-of-fund periods ended June 30, 2021.
  • We are carefully monitoring the Covid-19 situation across all economies and its potential short- and long-term impact on businesses.
  • I believe many of the leading companies of the 2020s and 2030s will originate in emerging markets.

How did the fund perform in the second quarter, and has your outlook changed for emerging markets?

For the second quarter, the fund outperformed its benchmark, the MSCI Emerging Markets Index [ND]. It also outperformed the benchmark for the 1-, 3-, 5-, 10-year, and life-of-fund periods ended June 30, 2021. Despite some volatility in the first half of the year, my outlook remains bullish for emerging markets.

Why should investors consider emerging-market stocks?

One reason is the simple concept of diversification. Investors who are only focused on U.S. equities should consider that the United States accounts for only 16% of world GDP — a figure that is shrinking. But more important, in my view, is that businesses in emerging markets offer so many of the world’s future growth opportunities. We are seeing an impressive amount of innovation and highly educated workforces in regions like North Asia. I believe many of the leading companies of the 2020s and 2030s will originate in emerging markets.

An example of emerging-market growth potential can be found in “unicorns.” This is a term used to describe privately held startup companies that are valued in excess of $1 billion. There are about 300 of these up-and-coming businesses in the world today. The United States leads the world in the number of unicorns, but number two is China and number four is India. China and India have the massive scale — each has a population of roughly 1.4 billion — that gives these unicorns the potential to grow into large, dynamic multinational companies.

A number of countries are still struggling with Covid-19. Does this concern you in terms of investment risk?

First, it’s important to note that over 70% of the emerging-market index — countries such as Korea, Taiwan, and China — have dealt with the pandemic more effectively than much of the developed world. Unfortunately, other countries, such as India and Brazil, continue to face major Covid-19 challenges. This, of course, is why active portfolio management is key. We are carefully monitoring the Covid-19 situation across all economies and its potential short- and long-term impact on businesses.

Our strategy emphasizes bottom-up stock selection across geographies and sectors, with a focus on high-quality companies with strong balance sheets. We tend to avoid countries, companies, and currencies that we believe are more vulnerable to external macroeconomic shocks. We believe this approach has helped us add value to the portfolio, especially in recent periods of increased market turbulence.

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