Holly Black: Welcome to the Morningstar series, "Ask the Expert." I'm Holly Black. With me is Wim-Hein Pals. He is Head of Emerging Markets Equity at Robeco. Hello.
Wim-Hein Pals: Good morning.
Black: So, we're talking about the outlook for emerging markets this year. There's a lot going on at the moment. What are your top line thoughts on the region?
Pals: Well, the region is looking good from a growth angle. So, we had some headwinds last year with the US-China trade issues. That's been resolved. And that's a major breakthrough early part of this year. Now, of course, we are in the midst of the coronavirus issue, which is another setback, and it's going to be a bit of a delay of the recovery but not a derail of the recovery coming through. So, with the last data, we're pointing towards a global economic acceleration from a GDP perspective not only in developed but also in emerging markets, and in a positive growth environment, a bit of an acceleration, not huge, but a bit of an acceleration is good for EM in general. And you see positive signs in a lot of large emerging countries ranging from China, to India, Brazil, Russia, where you see the GDP growth accelerating, and also earnings per share accelerating, EPS growth, and that's more important for us as equity investors in emerging markets, obviously.
Black: So, what are some of the most interesting themes and drivers you see? We hear a lot about increasing wealth and young demographics helping these economies.
Pals: Yeah, that is a very important point that you are pointing to. The acceleration in growth in the middle class, in the consumer is huge. In India, there's going to be 100 million extra wealthy individuals, wealthy consumers at the end of 2023 compared to today. So, that is a huge acceleration. And that's only India. And you have Indonesia where you have 300 million odd people going to a higher level of education and wealth at the same time, which comes with a lot of growth, the environment for the right stocks.
Black: And I think a big theme for investors this year is climate change and investing in a sustainable and responsible way. And a lot of people might be concerned that that might be harder to do in emerging markets. We have these, sort of, images of poor governance or non-environmentally friendly stocks. How do you find that?
Pals: Well, we've been very active on the ESG front since 2001 actually. So, over almost 20 years, we have been looking at ESG, particularly on the governance. We started at governance. The governance angle in emerging countries was famous of lousy compared to the developed world and they are catching up very, very fast. Depending on the country, of course, but some countries are catching up very fast. To give you an example – Korea, they paid out 10 – only 10 years ago, they paid out 10% of their earnings as a dividend to shareholders. Now, it tripled. Now, they're paying 30%. Today, it's more the E and S are gaining in importance, I have to say, particularly the environmental – as you pointed out, the environmental issue is crucial. So, we are looking at environmentally friendly sectors much more than we did 10 years ago. And there is a huge earnings growth to be found in some of these companies. In the battery segment, for instance, there's huge growth. All the major automobile producers are looking to electrify their platform and their cars and that comes with a lot of demand for batteries going forward. And there's a lot of emerging companies that deliver those batteries.
Black: Super. Well, thank you so much for your time.
Pals: You're very welcome.
Black: And thanks for joining us.
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