Three Extraordinary Years in Emerging Markets. Part 3

Portfolio manager John Paul Lech explores the defining changes of the last three years. Here he explains how he is navigating the new era of rising interest rates and financial tightening.

Key Takeaways

  • The exuberance of the pandemic rally favored companies that lacked profitability, cash flow, or a pathway to it. Liquidity can keep things going but it doesn’t generate a self-sustaining business model.
  • The war in Ukraine altered the dialogue around energy and indelibly changed the risk profile of companies whose states are known for pursuing kinetic action. These changes are likely to be long-lasting.
  • Interest rates don’t matter until they do. As rates rise, companies with high leverage have to roll over or replace existing debt with higher-yielding instruments, challenging margins.

On April 30, 2020, we launched the Matthews Emerging Markets Equity Fund (MEGMX). The ensuing three years saw more changes in emerging markets than the whole of the previous decade. It tested our approach and our processes. I’d like to reflect on those changes and on the market environments that dominated, how our process guided us through, and on the lessons we’ve learned.