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Pounding the Table on Emerging Market Opportunities

The investment arena can be prone to equivocation. We operate in a world of two-handed economists and market strategists hedging their commentary with an array of carefully chosen qualifying statements. As we turn the page to a new year, following one of the most difficult periods across assets in history, we are choosing to avoid these rhetorical conventions. Instead, we are “pounding the table” on opportunities the Calamos Global Team sees in emerging markets. Here’s why.

The dollar changed directions after a year of dominance and reaching a 20-year high. A stable to weaker dollar provides a critical tailwind to returns in foreign markets (Figure 1).

Figure 1. A weaker dollar provides a tailwind to non-US markets
US Dollar Index (1/6/20–1/6/23)

US Dollar Index (1/6/20–1/6/23)

Past performance is no guarantee of future results. Source: Bloomberg.

The dollar is significantly above fair value. Developed market central banks are approaching what may be peak rates for this cycle, whereas emerging market central banks are likely already past their peak. We believe this setup is dollar bearish. (For more, see our recent commentary, “Calamos Global and International Update: Reasons for Optimism in 2023.”)

Figure 2. The dollar is unusually far above fair value

the dollar is unusually far above fair value

Source: DB FX Research, Datastream.

China is reopening, and the pending consumption wave should make the US reopening experience look like a ripple, and the rolling nature should extend the duration. Chinese households are in excellent financial shape, and Chinese stocks have begun a period of standout strength since the end of October 2022. Reigniting the world’s second-largest economy may be the single most important demand dynamic this year.

Figure 3. China’s reopening is a massive global demand driver

China’s reopening is a massive global demand driver

Past performance is no guarantee of future results. Source: Gavekal Research/Macrobond.

The growth differential is accelerating in favor of emerging markets; and corporate earnings, particularly in China, offer the potential for growth and upside revisions amid a world of stagnation (Figure 4).

Figure 4. Economic growth of emerging markets relative to the US is accelerating into 2023–2024E

economic growth of emerging markets

Source: JP Morgan, “Key Trades and Risks, 2023 Year Ahead – Emerging Markets Equity Strategy,” December 1, 2022

Inflation pressures are moderating. The Fed’s aggressive tightening cycle and other central bank policies are significantly priced into markets. Many emerging markets started their hiking cycle before major developed markets. This head start and relative advantage in facing a lesser inflation challenge provide increased scope for policy stimulus in emerging markets.

Figure 5. CPI, %Y

cpi inflation

Source: Morgan Stanley (inflation differentials) using CEIC, Morgan Stanley Research. Note: Oct-22 Asia and Asia ex Japan aggregate includes actual for China, Hong Kong, Indonesia, Korea, Taiwan and Thailand, and MS forecasts for other economies.

Emerging markets are massively under-owned. Across fund managers, institutions and high-net-worth investors, almost nobody we speak with owns emerging markets at a level on par with their longer-term allocation target. As shown in Figure 6, the decline in emerging market equity foreign ownership since January 2021 was greater than during the Great Financial Crisis.

Figure 6. Foreign flow dynamics reflect negative sentiment and capitulation

Foreign flow dynamics reflect negative sentiment and capitulation

Source: CLSA, January 2023.

Valuations are not a timing tool in our team’s approach, but valuations help form the foundation for standout return opportunities in the years ahead. Across a range of metrics, emerging market equities are on sale, trading at historically attractive levels.

Figure 7. Forward P/E discount: Developed markets ex-US and emerging markets relative to US

forward pe discount

Past performance is no guarantee of future results. Source: Bloomberg. P/E: Price divided by 12-month forward consensus expected operating earnings per share. Weekly data.

Emerging markets bottomed on October 24, 2022. Following major drawdowns in EM over the past 30 years, the returns have been impressive—an average 50% return in the year following a bottom.

Figure 8. Emerging markets: Major drawdowns and subsequent performance

EM: Major drawdowns and subsequent performance

Past performance is no guarantee of future results. Source: Bloomberg.

The holidays are complete and we’re all getting back to work. It is time to review your emerging markets allocation and consider upgrading your emerging market investment vehicle. Over a three-year cycle of enormous disruption, innovation, and rotation, Calamos Evolving World Growth Fund (CNWIX) outperformed the MSCI Emerging Market Index by over 500 basis points annualized.

Figure 9. CNWIX Performance versus the MSCI Emerging Market Index
Through an active and dynamic risk-managed approach, Calamos Evolving World Growth Fund (CNWIX) delivered a positive return for investors amid a sea of red in emerging markets.

cnwix performance versus index

Past performance is no guarantee of future results. Source: Bloomberg.

China’s reopening, a weaker dollar, improving growth differentials, and an easier policy backdrop are critical catalysts. These forces, combined with the backdrop of a decade of emerging market underperformance of historical size, washed-out sentiment, and chronic underinvestment bring us to our conclusion: “pounding the table” on the relative and absolute investment opportunity in emerging markets makes sense for 2023.

Before investing carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-866-363-9219. Read it carefully before investing.

Calamos Evolving World Growth Fund average annual returns and expense ratio

Important Risk information. An investment in the Fund(‘s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund’s prospectus.

The principal risks of investing in the Calamos Evolving World Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, foreign securities risk, emerging markets risk, convertible securities risk consisting of the potential for a decline in value during periods of rising interest rates and the risk of the borrower to miss payments, and portfolio selection risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

Indexes are unmanaged, do not include fees and expenses, and are not available for direct investment. Unmanaged index returns assume reinvestment of any and all distributions and do not reflect any fees, expenses or sales charges. Investors cannot invest directly in an index.  MSCI Emerging Markets Index —a free float adjusted market capitalization index. It includes market indexes of Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The MSCI World ex-US Index is a market capitalization weighted index composed of companies representative of the market structure of developed market countries in North America, Europe and the Asia/Pacific region, excluding the United States. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets and emerging markets. The MSCI ACWI ex US Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 26 Emerging Markets (EM) countries. The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 622 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US. The MSCI ACWI ex USA Small Cap Index captures small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 24 Emerging Markets (EM) countries. The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 714 constituents, the index covers about 85% of this China equity universe. The US Dollar Index measures the value of the US dollar relative to a basket of foreign currencies, including Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. Opinions are subject to change due to changes in the market, economic conditions or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. 

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