​Podcast: International Markets Make a Comeback

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Revolutions in digital education, artificial intelligence and efficiency methodologies are not U.S.-only technologies. China is racing to roll out 5G, and other countries will be very close behind. In our latest podcast, Portfolio Manager Greg Jones discusses the recent resurgence of international and emerging market companies during the course of the pandemic.

ALEX BERNSTEIN: Hello, I'm Alex Bernstein and you're listening to The Alger Podcast: Investing in Growth and Change.  Over the course of the recent pandemic, many investors have noticed the surge in international and emerging markets companies and may be wondering what’s been driving that surge.  To answer that question, I’m speaking with Alger Portfolio Manager Greg Jones who, along with Pragna Shere, manages our international and emerging markets strategies.  Greg, thanks so much for talking with me this afternoon.  
GREG JONES: Thanks, Alex.

ALEX: Greg, Pragna mentioned to me that you were actually in China back in March right when the outbreak first came to a head. When you were in China, did you know what was going on?

GREG: I certainly was aware.  I was in Shanghai and then Beijing, and the interesting side of the story was that the focus at that point was the soon-to-be-signed trade one deal between China and the U.S. and given all of the tension in the prior 12 months, that was issue number one and all the discussion surrounded that.  

I was aware of a virus occurring in and around Wuhan, but we thought that it was local and really wouldn’t develop into the kind of global health crisis it has become.  

ALEX: In retrospect, did you feel like you got out just in time?  

GREG: I think it was good fortune rather than any specific planning.  It’s not like China hasn’t experienced these types of situations.  I mean they had SARS in 2002-2003.  They have had other health crises since then, and they’ve actually become quite good at reacting despite all the criticism.  I think we have to acknowledge that they’ve contained and managed it quite well. 

ALEX: Greg, how do you think international markets have evolved over the past few months? 

GREG: So, the trade deal or trade truce was a piece of good news at the beginning of the year.  With COVID-19, it quickly dissipated. So, the path of this crisis has been very similar to prior periods.  Initially there’s tremendous uncertainty.  Investors gravitate toward “safe assets”, which are perceived to be the U.S. dollar, sometimes the Swiss franc, sometimes gold, U.S. Treasuries and not emerging market currencies and often not international currencies which, in this case, we’re principally talking about the euro, the pound and the Japanese yen.  But it was EM currencies that bore the brunt of this wave to “safe assets”, and it occurred in a very compressed period of time: February to basically the end of March/early April.  

Since then, you’ve seen a shift back toward more normal conditions. And once you move beyond the worst part of the crisis, currencies have normalized.  

ALEX: International markets and emerging markets have surged recently. What do you think is driving the surge? 

GREG: Two things.  One, an overreaction when we were at the peak of uncertainty, and you saw aggressive selling of currencies and equities, and since then you’ve seen this rebound because of the overreaction.  You also had massive stimulus announcements of very significant fiscal stimulus around the world, and that has given comfort and some visibility to investors that we are going to see a pretty strong recovery in 2021 and 2022.  

ALEX: Greg, over the course of the pandemic have you and Pragna been focused on regional themes or on specific companies?  

GREG: When emotions are running high, we try to take advantage of the opportunity to build positions in companies that we think really will be at the forefront of digital transformation or other areas where we think the tailwinds may be multiyear, five-year or ten-year situations.  And so we have taken advantage of those opportunities when they were presented in March specifically in Europe but in Asia as well, and they tend to be again more focused in areas that are beneficiaries of digital transformation, productivity enhancement situations, certain areas of consumption, education. And geography doesn’t always play really a role there.

Revolutions in digital education, in artificial intelligence, in efficiency methodologies, in production, and warehouse and distribution, these are not U.S.-only technologies. China is racing to roll out 5G, and other countries such as Korea will be very close, not far behind.  You’ll see that and a focus on artificial intelligence, a number of developments in the area of robotics.   

Education is one where, almost regardless of the culture, when incomes are challenged, when there’s some uncertainty, education is one of the last things that is cut in a family budget.  So there’s a willingness to spend on education and right now the ability to deliver that education and deliver the content for students who are at home or, once they start to return to school, but maybe their additional tools and after-school tutoring will be via digital means.  

So, education is certainly one we find a lot of interesting companies around the world and specifically in developing countries where public education and the investment in public education has not kept up, and so this is seen as a way of maintaining a high level or increasing a high level of education in the most efficient manner. 

And again, these are not technologies that reside in one company or in one country.  They tend to exist across the world, and of course many of the top companies are enablers, and they bring their services, either software packages or consulting services, around the world as well.  

ALEX: Do you hold any of the international companies that are actively pursuing a vaccine in your portfolios?

GREG: There are three or four leading candidates currently, and they are being funded as part of a U.S. project to bring a vaccine quickly to the market, and we hold one of those in our international strategy.  

I think a number of people expect that there will be several vaccines when all is said and done, and some of them will come from some of the pharmaceutical and research biotech efforts in developing countries.  At this point, we felt that those leading candidates had an edge, and that’s where we’ve focused our attention. 

ALEX: Greg, it seems like international and emerging markets have trailed the U.S. for a few years now.  Now that they appear to be making a significant comeback, is your response, Well, it’s about time? 

GREG: Yes.  No.  It’s a very good question.  International and emerging markets have trailed the U.S. for several years, and I think that to a large degree this divide between growth and value has hampered the performance of international and emerging markets, but I do think we’ve had a reset; emerging markets, for example, just after the Global Financial Crisis.  

So, if you go back ten years or so, you’ll see an index that was heavily weighted toward commodities in terms of sector orientation, materials and energy representing nearly half of the benchmark, and a number of traditionally commodity-heavy countries–Brazil, South Africa, Russia–representing well over half the benchmark.  

What you have now is a situation where the emerging market opportunity set index now looks much more like the U.S. with the commodity portion of the opportunity set declining substantially, and the growth portions of the opportunity set–technology, consumption, health care–being more than half the index.  

So, you have an index that’s far more growth-oriented.  So, you now have I think a situation where it’s less about the value opportunity and more about the growth, which parallels that of the U.S., and that I think should be interesting to most investors.  

ALEX: Greg, thanks so much for talking with me this afternoon. 

GREG: Thanks, Alex.  Very nice speaking with you. 

ALEX: And thank you for listening. 

For more information on Alger’s international and emerging markets strategies, and for more of our latest insights, please visit www.alger.com.


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