MAY 2019 1

In this Q&A, William Palmer and Michael Levy, Co-Heads for Emerging and Frontier

Equities, discuss their approach to accessing the asset class, current trends, and why recent

headwinds may be becoming tailwinds.

William Palmer Co-Head Emerging and Frontier Equities

Michael LevyCo-Head Emerging and Frontier Equities

BARINGS CONVERSATIONS

Global Emerging Markets Equities: Where Do We Stand?

EQUITIES

BARINGS CONVERSATIONS MAY 2019 2

EM equities have started 2019 positively after a challenging end to last year. How is the asset class now positioned for investors?

Michael: The correction in equity markets last year reflected investor concerns regarding the

U.S. Federal Reserve’s tightening, and the potential implications for EM countries, especially those

with current account deficits. In addition, rising trade tensions between the U.S. and China also

contributed, raising questions on global growth. In our opinion, these two factors led investors to

demand a higher risk premium for investing in EM equities.

William: We note the risks associated with these events have fallen in the last few months.

Firstly, the Federal Reserve has become much more dovish in response to more mixed economic

data in the U.S. Secondly, there has been significant progress in the trade discussions between

the U.S. and China. The reversal of these former headwinds into potential tailwinds have been a

significant driver of markets so far this year.

Michael: As economic activity slowly improves, corporate earnings should also follow. This is likely

to provide further support for equity prices as confirmation of this earnings improvement materializes.

William: It’s also worth noting investor expectations remain depressed as reflected in the

modest consensus forecast earnings growth for 2019 and attractive relative valuation versus MSCI

world equities on both a P/E and P/B basis. This low bar gives considerable potential to positively

surprise over the course of this year, while current valuations provide an attractive entry point for

investors to build a strategic position in emerging market equities.

FIGURE 1: Emerging Markets Equities are Forecast to Continue Reporting Positive EPS Growth

SOURCES: Barings, Factset, MSCI. As of April 30, 2019.

80%

60%

40%

20%

0%

-20%

-40%2007 2009 20112008 2010 2012 2014 2016 20192018 202120202013 2015 2017

EPS Growth Foward Looking Estimates

Which equity markets in EM do you prefer?

William: As bottom-up managers, we don’t engage in top-down country selection. We want

to look across the whole investment universe in order to identify the most attractive opportunities

and build a well-diversified investment portfolio. Clearly macro risk cannot be ignored, so we

aim to capture this in our analysis through the cost of equity we set for each individual company.

China remains a country where we continue to find a wealth of exciting investment opportunities,

especially in areas such as technology and insurance.

BARINGS CONVERSATIONS MAY 2019 3

What are the potential risks and opportunities if the U.S./China trade talks don’t reach a swift resolution?

Michael: We observe the substantial progress on trade talks

between China and the U.S. over the past few months. In recognition

that a trade war is damaging to all economies and financial markets,

both sides appear willing to reach a satisfactory resolution on key

areas such as the bi-lateral deficit, intellectual property protection

and market access. Confirmation of such an agreement would clearly

lift investor, corporate and consumer confidence in China and across

emerging markets.

William: Rising protectionism naturally leads to greater uncertainty.

If there is not a relatively swift resolution, it may lead to slower global

growth in the near term, but over the medium term, growth is likely

to revert back to more normalized levels. Policymakers are well aware

of the downside risks from the trade tensions, which is why China has

announced fiscal easing measures amounting to 1.5%–2% of GDP. This

should support economic activity and corporate profit growth as we

progress through 2019 and beyond.

What long-term growth opportunities do you see in EM?

William: Whilst the EM middle class is rapidly growing, it is crucial

to look much deeper and understand the changing demographic

in order to identify what this segment is likely to consume going

FIGURE 2: The Price to Book Ratio of Emerging Markets Looks Appealing Versus Global Peers

SOURCES: Barings, Factset, MSCI. As of March 31, 2019.

Re

lati

ve V

alu

atio

n In

de

x

1.3

1.2

1.1

1.0

0.9

0.8

0.5

0.7

0.6

Mar-2019Mar-2017Mar-2015Mar-2013Mar-2011Mar-2009Mar-2007Mar-2005

One Standard Deviation BandRelative PB LT Average

forward. We see huge opportunities in areas such as financial services,

particularly pensions, life insurance and more sophisticated financial

savings products which create opportunities for equity investors

in the insurance and banking sectors. We also see opportunities in

private health care, private education and across the technology space,

including hardware, software, social media and e-commerce.

Michael: On that point regarding e-commerce and the internet, the

internet has clearly gained significant adoption in EM, and, there are

a variety of unique investment opportunities within emerging market

countries. For example, in Russia we believe that domestic players

such as Mail.Ru and Yandex are best placed to capture future growth

dynamics given respective market leading positions in social media

and on-line search. As Russia’s digital economy matures and consumer

behavior and spending patterns shift, these domestic service providers

are rapidly growing advertising revenue, e-commerce revenue and

capitalizing on new revenue opportunities in the sharing economy.

William: We also aren’t ignoring opportunities in traditional areas

of the economy; for example, there are some incredibly well-managed

companies in the resources sector that are generating impressive cash

flow, even based on conservative resource price assumptions. This is

important because as a bottom-up manager, we don’t want to have a

narrow focus. We want to look across the whole investment universe in

order to identify the most attractive investment opportunities and build

a robust and diversified investment portfolio.

BARINGS CONVERSATIONS MAY 2019 4

“We strongly believe in active investing because emerging markets are naturally very inefficient, particularly because of low analyst coverage compared to their developed market peers”

What’s the best method of accessing the EM opportunity: active or passive investing?

William: We strongly believe in active investing because emerging markets are naturally very

inefficient, particularly because of low analyst coverage compared to their developed market peers,

and also high retail investor participation. The wealth management industry hasn’t yet developed to

the same extent as the West, and as a result, people invest directly into shares as opposed to mutual

funds. The Chinese market is a good example, where retail investor participation accounts for more

than 80% of daily market turnover, according to the World Bank. This can lead to a lot of share price

overreaction, to both positive and negative news, and, as a result, create inefficiencies which can be

captured by applying a fundamental, bottom-up process.

Michael: Passive investing by nature anchors investors to a specific benchmark. In our view, the

main benchmark, the MSCI Emerging Markets Index, is not a true representation of the opportunity

set in EM, and we consistently find sources of alpha in companies outside the benchmark. Another

development in recent years is a change in regulation through MIFID II. Sell-side company research

in emerging markets has declined significantly due to a reduction in analyst coverage of equity

stocks in EM, which creates further inefficiency that an active manager can exploit, particularly over

a medium to long-term horizon such as the five-year research horizon we use at Barings.

How is Barings’ investment process different from other EM managers?

William: As a bottom-up manager, we focus on fundamental company research, but we also aim

to capture macro risks through our cost of equity calculation, differentiating the risk environment

in each country. As a result, we’re able to assess total risk for each company in our portfolio. This

essentially helps ensure that we reflect currency risk when investing in EM, which can have a

significant impact—positive or negative—on the investment return to clients. For instance, in a high

inflation country such as Turkey, quite a lot of your local currency return can be eroded by currency

depreciation when it’s translated back into U.S. dollars, so we would require a much higher expected

return before we invest to compensate for the higher risk.

BARINGS CONVERSATIONS MAY 2019 5

Michael: We also have fully integrated Environmental, Social and Governance (ESG) analysis

into our process by ensuring that a company’s ESG score automatically impacts the cost of equity,

or required return. Industry-leading ESG practices can support a positive assessment, while poor

management attitude towards ESG, or worrying environmental or social issues, is sufficient to

downgrade an assessment to such an extent that investing in the company becomes unattractive.

FIGURE 3: Our Approach to ESG

SOURCE: Barings. As of March 31, 2019.

SOURCE: Barings. As of March 31, 2019.

EXPERTISE & EXPERIENCEour research capability is supported by

located in

30 INVESTMENT PROFESSIONALS

LONDON, HONG KONG AND TAIWAN

with an average of

EM SPECIALISTS

DIFFERENT NATIONALITIES15+YEARS OF INVESTMENT EXPERIENCE

13

the team is formed by

of

Factors Considered 9 Key Topics

Franchise: Sustainability of the Business Model

• Employee satisfaction• Resource intensity• Traceability/security in supply chain

Management: Corporate Governance Credibility

• Effectiveness of supervisory/management board• Credibility of auditing arrangements• Transparency and accountability of

management

Hidden Risk: On Balance Sheet

• Environment footprint• Societal impact of products/services• Business ethics

Any final thoughts?

William: Over the long run, we believe corporate earnings should drive equity prices.

Given that long-term economic growth is higher in emerging markets versus developed

markets, it seems sensible for investors to have exposure in this asset class. As emerging markets

introduce more orthodox policy making and embrace economic reforms, this should lead to

more sustainable economic growth, which should be reflected into asset prices over time.

IMPORTANT INFORMATION

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject

to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily

indicative of the future or likely performance. Investment involves risk. The value of any investments and any income

generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS

NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment results, portfolio compositions and or examples

set forth in this document are provided for illustrative purposes only and are not indicative of any future investment

results, future portfolio composition or investments. The composition, size of, and risks associated with an investment

may differ substantially from any examples set forth in this document. No representation is made that an investment will

be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value

of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk

factors of any Fund/Strategy discussed in this document.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global

affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings

Japan Limited, Barings Real Estate Advisers Europe Finance LLP, BREAE AIFM LLP, Baring Asset Management Limited,

Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland)

Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland

Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC

(each, individually, an “Affiliate”).

NO OFFER: The document is for informational purposes only and is not an offer or solicitation for the purchase or sale

of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of

the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and

must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation

about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and

must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in

good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual

portfolio management teams may hold different views than the views expressed herein and may make different

investment decisions for different clients. Parts of this document may be based on information received from sources we

believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate,

Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of

the information.

Any service, security, investment or product outlined in this document may not be suitable for a prospective investor or

available in their jurisdiction.

Copyright in this document is owned by Barings. Information in this document may be used for your own personal use,

but may not be altered, reproduced or distributed without Barings’ consent.

Barings is a $317+ billion* global financial services firm dedicated to meeting the evolving investment and

capital needs of our clients and customers. Through active asset management and direct origination, we provide

innovative solutions and access to differentiated opportunities across public and private capital markets.

A subsidiary of MassMutual, Barings maintains a strong global presence with business and investment

professionals located across North America, Europe and Asia Pacific.

*As of March 31, 2019

19/829234

LEARN MORE AT BARINGS.COM