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Investing in Emerging Markets: riding the volatility wave

05/22 GIB Asset Management By Megan Ie & Marcin Lewczuk, CFA

It’s a well-known adage that volatility is inevitable when investing in emerging markets. However, recent developments have been particularly challenging. Rising geopolitical tensions, disrupted supply chains and a paradigm shift in the global monetary policy outlook have resulted in heightened investor uncertainty and associated volatility.

Power of purpose prevails

The Russian invasion of Ukraine has cast the spotlight on several pertinent issues.

The uncomfortable dependence on Russia for oil and gas has redefined decarbonisation efforts. No longer driven just by climate change and hence the need to shift to more renewables, there is also increased will in the non-participation of the implied indirect financing of the war.

At the same time, the current situation has given more grounds for engagements focused on social issues. In particular, what actions companies are taking to support the people that they employ, interact or engage with, has become more important. It feels like the moment of truth for corporate leaders to live up to their rhetoric on how they are committed to positively impacting the people around them.

Underlying both of these points is that all stakeholders matter.

We strongly believe that companies that positively contribute to society with the desire to consistently improve their ESG standing deserve a lower implied cost of capital, in turn resulting in a higher company valuation in the longer term. By focusing on what they can control, companies that choose to integrate social priorities often also benefit from the bolstering of their competitive advantage and further entrench customer captivity, thereby resulting in better cashflow generation.

One of our portfolio holdings, an Eastern European e-commerce solutions provider, is a good example of a company that has been proactively helping the Ukrainian refugees since the crisis began. This logistics and parcel locker network company, has been utilising its extensive network of transport and resources to organize the delivery of vital supplies to Ukraine. Similarly, they are taking steps towards decarbonisation as delivering a parcel to aLocker is not only 25-30%1 cheaper compared to to-door delivery, but also produces 65% less CO2 emissions2. Furthermore, it is also an example of a company that, by helping their customers solve major environmental problem, is capable of generating strong unit economics at the same time as ROIC (return on invested capital) sustainably above the cost of capital level. They have also shown how going the extra mile for society does not have to defy returns maximization.

Staying the Course

Inexperienced investors can panic in times of volatility, but for us staying true to our established investment approach remains key. Given active engagement is central to the GIB AM Emerging Markets Active Engagement Strategy, this anchor to our disciplined process means we can identify high-conviction investment opportunities and drive positive changes to create emerging ESG winners even amidst the uncertainties, heightened volatility and fear prevalent in today’s markets.

[1] As per company’s public comments

[2] Company’s 2020 Annual Report

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