Perspectives on Emerging Markets Opportunity

Nick Niziolek, CFA, Dennis Cogan, CFA, Paul Ryndak, CFA, and Kyle Ruge, CFA

Summary Points:

• Calamos Evolving World Growth Fund’s performance for the quarter and year-to-date exceeded that of the MSCI Emerging Markets Index.
• CNWIX’s positioning aligns with our view that the economy is in a disinflationary growth market cycle regime.
• We are active growth investors, with our positioning in India and industrials exemplifying our high-conviction approach.
• We invest opportunistically in convertible securities as a way to enhance risk/reward skew, and are excited to see emerging market companies ramp up their participation in the convertible market.

Global equity markets added to year-to-date gains during the second quarter, even though economic data regarding the growth and inflation outlook remained mixed. Emerging market equities performed with strength during the quarter: The MSCI Emerging Markets Index’s return of 5.1% outpaced both the S&P 500 Index (up 4.3%) and the MSCI ACWI ex USA Index (up 1.2%).

Calamos Evolving World Growth Fund Has Performed Strongly in 2024

Source: Morningstar.
Performance data quoted represents past performance, which is no guarantee of future results. Current performance may be lower or higher than the performance quoted. Please refer to Important Risk Information. The principal value and return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance reflected at NAV does not include the Funds’ maximum front-end sales load of 4.75%. Had it been included, the Funds’ return would have been lower. All performance shown assumes reinvestment of dividends and capital gains distributions. As of the prospectus dated 3/1/2024, CNWIX’s gross expense ratio is 1.38%.

Peak Covid re-opening tailwinds and peaks in inflation and accelerating growth are all in the rearview mirror for most major economies. Even so, we believe the global economy is resilient overall, and recession is not our base case. Regarding our macro framework, we believe we are in a period of disinflationary growth characterized by decreasing inflation and decent economic fundamentals, which is a generally benign backdrop and an ideal environment for growth equities, including those with secular tailwinds. Below, we highlight some key positioning themes in Calamos Evolving World Growth Fund:

Industrials: A Closer Look

Our exposure to the industrial sector is multi-dimensional, spanning secular, turnaround/capital improvement, and more cyclical names. Reflecting the sector’s breadth of opportunity, the Fund’s allocation to industrial companies is more than double that of the MSCI Emerging Markets Index. The secular opportunities for data center infrastructure are among the most exciting for the sector. Both power and thermal equipment will see an uptick in demand because AI chips and servers use three to four times more electrical power than traditional central processing units. According to the IEA, global data center total electricity consumption is expected to double from 2022 to 2026.

As overall electricity consumption rises, new infrastructure investments will be made inside data centers (e.g., new servers, cooling equipment, and additional power supplies) and outside the centers to expand power generation and transmission to meet demand.

Our overweight also reflects the bottom-up fundamentals in many industrial companies, including improved operational efficiencies, margins, and cash flows; and new management teams committed to strengthening competitive positioning. Japan-domiciled companies are well represented within our industrial holdings, where country-specific factors provide new catalysts for management teams to improve operational efficiencies, eliminate noncore holdings, and return capital to shareholders—a welcome shift after years of stagnant corporate evolution.

The Opportunity of EM Convertible Securities

We use convertible securities opportunistically to improve the fund’s risk/reward skew. Convertibles allow us to capture equity market upside with potentially less downside exposure, providing an attractive way to access growth opportunities. Over recent quarters, we have increased our exposure to emerging market convertibles. We have built exposure to attractive businesses by investing in convertible structures that are less volatile than their underlying equities while still providing exposure to the stock market’s upside.

During the second quarter, several large Chinese internet companies issued convertible bonds to fund stock buybacks, and their management teams communicated to the market that they believed the underlying equities were significantly undervalued. In several cases, we also had a favorable view of valuations and invested in these newly issued convertibles to participate in well-priced access to growth.

Votes Are in: India’s Growth Story Is Intact

The fund’s largest country weighting is to India, representing more than one-third of the portfolio and more than twofold its benchmark’s weight as of June 30, 2024. We’ve been bullish on India for quite some time, where the encouraging economic and policy reforms championed by Prime Minister Narendra Modi are just one of many catalysts. Although India’s equity market hit a bit of an air pocket after recent national election results diverged from exit-poll expectations, we believe India’s growth story and investment cycle are strong.

While Modi won his third straight term as prime minister and a ruling coalition led by the incumbent Bharatiya Janata Party (BJP) and a second party held the majority, the BJP lost seats. Although this contributed to a selloff in Indian equities immediately following the election, the market has since steadied and regained ground.

We believe pre-election policies are likely to stay on track. Major post-election ministry appointments should provide continuity of policy direction, with ministerial heads of Roads & Highways, Railways, Home, Defense, and Ports all retained by the BJP. Moreover, the government-mandated crop price implemented post-election aligned with the average hike over the past decade, easing concerns that the government would implement populist policies to appease the rural population. Additionally, there could be some positives resulting from the structure of the current coalition government, including a lower chance of constitutional and sweeping policy changes. The coalition may act as a check to keep the BJP honest in doing what it has said it would do.

Accordingly, our long-term thesis on India hasn’t changed. The investment cycle continues, and the government’s healthy fiscal position can support existing policy direction. The fund continues to access India’s growth primarily through real estate and capex-driven industries that will benefit from the continuation of the investment cycle and government policies that encourage infrastructure and manufacturing growth. We have also identified opportunities in consumer-facing industries that can benefit from India’s favorable demographic trends, such as the rapid growth of the country’s middle-class and working-age populations.