Emerging markets, once the prodigal son of the equity world, have certainly fallen out of favour.
The recent sell-off has kept sentiment subdued, and continued rumblings between Ukraine and Russia and concerns on the outlook for China have added pressure.
But the wheel of fortune has now reversed so much that the once-unassailable five-year return of the MSCI Emerging Markets index is now in trouble.
For the five years to March 26 2014, the MSCI Emerging Markets index delivered a return of 60.25 per cent, according to FE Analytics. But the combination of faltering emerging markets and a resurgent US and developed world means the MSCI World index has outperformed it by more than 30 percentage points, with a return of 92.47 per cent.
With myriad events seeming to conspire against it, is the end nigh for emerging markets? Predictably, the answer is “not yet”.
While the major emerging economy of China is slowing, it is still on track for high single-digit GDP growth this year, while India is starting to make a recovery after addressing its fiscal issues.
But there are other economies and countries to take into account. For example, Malaysia is attempting to create ‘the Asian Canary Wharf’ with its Tun Razak Exchange, while the imminent arrival of Qatar and the United Arab Emirates in the MSCI Emerging Markets index in May could open up a whole host of new opportunities.
In addition, elections are due this year in roughly 16 emerging markets, including all of the ‘Fragile Five’ – Indonesia, India, South Africa, Turkey and Brazil – which will no doubt increase the interest in these economies.
However, as Paul Rogers, manager of the Lazard Emerging Markets Core Equity fund (see opposite), points out, emerging markets are continuing to consolidate. “The reason we call them emerging is they have less developed financial markets,” he said. “They are taking longer to recover than the US and other countries. We’re in the consolidation phase after a very strong growth period. But as the world stabilises and global growth picks up, that will be a very good environment for emerging markets going forward.”
It may be that investors are beginning to realise that emerging markets aren’t perhaps as bad as first thought, with a recent BofA Merrill Lynch Global Research report, The Flow Show, noting that the end of March saw the first equity inflows into emerging markets since January 14 this year, as the prospects of Chinese stimulus and attractive yield opportunities seem to stem the tide of outflows.
In addition, the report shows that emerging markets experienced the lowest level of outflows in 22 weeks, while “stocks of the fragile five have on average rallied 13 per cent” since the beginning of March.
While these are just glimmers of light at the end of the tunnel, it is better than pitch darkness. Also, it shows that even the worst situation can recover, and that being a long-term investor rather than a short-term trader can produce its own rewards.
PICKS
Somerset Emerging Markets Dividend Growth
Edward Lam is lead manager on this £525m fund from Somerset Capital. It invests in companies with prospects for long-term cashflow and dividend growth with the aim of building a portfolio of stocks with an above-average dividend yield. The portfolio is relatively concentrated, with 40 stocks selected from a bottom-up fundamental process run by a team of managers and analysts in London and Singapore. Its three-year return of 11.42 per cent puts it in the top five of the IMA Global Emerging Markets sector.
Utilico Emerging Markets
This Bermuda-based investment trust is unusual in that it invests predominantly in infrastructure, utility and related sectors mainly in emerging markets. It seeks to minimise risk by investing in companies and sectors displaying the characteristics of “essential services or monopolies such as utilities, transportation infrastructure, communications or companies with a unique product or market position”. Since its launch in 2005, it has remained in the top three of the AIC Global Emerging Markets Equities sector over one, three and five years, posting a return of 118.69 per cent for the five years to March 27.
EDITOR’S PICK
Aberdeen Emerging Markets Equity
This is one of the longest-running and largest funds in the IMA sector, with £2.3bn in assets under management. The largest sector weighting is to financials, at 33.9 per cent, and the largest country weighting is to China/Hong Kong, at 16.8 per cent. It tops the IMA sector in the 10 years to March 27 with a return of 297.34 per cent, compared with the sector average of 171.78 per cent. Like most GEM funds, it has suffered in the recent sell-off, with a one-year loss of 17.41 per cent. However, with an experienced team behind it, this fund is expected to return to form.
