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Increasing global capex bolsters argument for EM outperformance

By Rhea Nath
4 minute read

An investment executive has pinpointed how increasing capital expenditure, which has been on the rise since the pandemic, could prove to be another tailwind for emerging market equities.

While emerging markets (EMs) are currently “unloved”, Steven Gray, head of global emerging markets at Eastspring Investments, believes these stock markets have the potential for strong outperformance in the coming years.

Speaking at a media briefing in Sydney last week, Gray highlighted several indicators that he believes point towards a positive future for EMs, such as the rising global capital expenditure (capex) in companies.

“The discussions I’m having at the moment are, yes, [emerging markets] look interesting, but you could have said this at any point of time. What is different now and makes me more interested in thinking about my emerging market allocations?” he said.


For Gray, a significant source of optimism in emerging markets stems from the notable increase in capex, which has been on the rise since 2020, marking a departure from the downtrend seen in the previous decade.

He argued “this makes a lot of sense”, given EMs boast significantly large commodities and manufacturing sectors, both of which are now focused on building up their tangible assets.

“Emerging markets typically outperform as capex increases. Capex had been decreasing between 2010 and 2020, but since then, we have started to see an increase in capex across both developed markets and EMs,” Gray observed.

“Historically, there is a strong positive relationship between increasing capex and the performance of EMs, with markets outside China benefiting from increased exposure to materials, industrials, and financials.”

While one factor driving the growth in capex has been the necessity to replace fixed assets within businesses, Gray highlighted other factors such as the need for firms to build-up their capabilities ahead of the energy transition. According to research from BloombergNEF, energy transition investment in emerging and developing markets, excluding China, reached a new record of $85 billion in 2022, up 10 per cent from 2021.

Gray also pointed to investments stemming from shifting global supply chains

“It’s not just shifting out of China, but when you have conflicts in the Middle East, in Ukraine, people are more worried about not being able to control their supply chain, so they are re-investing in reshoring, onshoring.

“There is a pick-up in investment,” he added.

According to Gray, the largest beneficiaries of this move are likely to be in ASEAN, Latin America, India, the Middle East and Africa, markets with cheap labour, large and young populations, decent manufacturing bases, and a high economic growth potential.

“The combined manufacturing value-add of these countries is less than half that of China. As such, a small shift of supply chains away from China adds a significant amount of manufacturing value-add to these countries and create interesting investment opportunities,” he said.

Gray also highlighted how EM equities have both a strong valuation and structural tailwind relative to developed market equities, and increased capex could help boost this superior performance.

“Emerging markets are very unloved at the moment and have de-rated considerably since 2010 – from trading at a premium relative to developed markets to trading at a huge discount relative to developed markets,” Gray said.

“While EMs have disappointed, that is priced into markets. So, relative valuations are now very attractive to investors and expectations are low.”

In April, global investment manager Ninety One also identified that the world stands “on the cusp of a global capital expenditure supercycle”, triggered by a combination of the energy transition, nearshoring, geopolitics, demographics, technology, and public investment spending.

Its base case scenario suggested these transformative macro-economic trends will drive global capex by an additional US$2.5 trillion per year, while its best-case scenario placed the figure higher at US$5 trillion.

“Stock beneficiaries are not restricted to the US but are spread across geographies and are primarily in physical asset-intensive areas of industrials, resources and utilities, sectors that lagged or tracked the market in the post-GFC period.

“Both developing and emerging markets are likely to benefit,” Ninety One said.