First-quarter pullback was a buying opportunity


Q1 2021 Putnam Emerging Markets Equity Fund Q&A

  • The fund outperformed for the 1-, 3-, 5-, 10-year, and life-of-fund periods ended March 31, 2021.
  • In our view, the 10% pullback in March was a buying opportunity, and emerging-market equities remain poised to deliver strong performance.
  • China is producing more patents and Ph.D.s than the United States, which we believe will foster the creation of some of the most successful companies in the 2020s.

How did the fund perform in the first quarter?

For the first quarter, the fund underperformed its benchmark, the MSCI Emerging Markets Index [ND]. However, it outperformed the benchmark by a considerable margin for the 1-year period ended March 31, 2021. It also outper-formed for the 3-, 5-, 10-year, and life-of-fund periods.

Emerging-market stocks suffered sharp declines late in the quarter. What is your view on this and overall conditions?

In our view, the 10% pullback in March was a buying opportunity. We believe emerging-market equities remain poised to deliver strong performance for three key reasons. First, they offer attractive relative and absolute valuations. Emerging-market equities are trading at a significant discount to the S&P 500, and many of these businesses offer a much stronger growth outlook than their U.S. counterparts, in our view. Second, we have supportive interest rates and liquidity. For example, interest rates in Brazil are just 2%, down from 14% four years ago. We believe this will drive a re-rating in equities and an acceleration in capital expenditures for businesses in Brazil. We expect this theme to play out in several other key emerging markets.

Finally, and most important, earnings-per-share growth is accelerating. Emerging-market GDP growth is likely to be 5%+, versus normalized levels of 2% growth in the developed world. And China is now producing more patents and Ph.D.s than the United States, which we believe will foster the creation of some of the most successful companies in the 2020s.

What is your outlook, and how are you positioning the portfolio as we begin a new quarter?

The rollout of new Covid-19 vaccines is under way in many countries, including China, the world’s second-largest economy. Financial markets are anticipating widespread distribution of vaccines by mid-2021. Emerging-market stocks are expected to benefit from their focus on commodity exports, which should get a boost from strong Chinese economic growth and a weaker U.S. dollar.

Our strategy emphasizes bottom-up stock selection across geographies and sectors, with a focus on high-quality companies with strong balance sheets. We tend to avoid countries, companies, and currencies that we believe are more vulnerable to external macroeconomic shocks. We believe this approach has helped us add value to the portfolio, especially in the periods of increased market turbulence we’ve seen since early 2020.