Pressure on oil and China shows in EM

Worries China was in for a hard landing and the slump in the price of Brent crude proved to be headwinds last year and in the first quarter of 2016. FE Analytics shows the MSCI Emerging Markets index is down 6 per cent in the year to June 21 2016 in sterling terms, behind most other major regional indices.

Erik Lueth, emerging market economist at Legal & General Investment Management, notes: “Emerging markets have underperformed developed markets in the last four years and the key reason for that is their dependence on commodities. These have done very poorly because of the slowdown in China and its rebalancing, which is commodity-intensive, towards [a] consumption [-led economy].”

The performance of the so-called Brics – Brazil, Russia, India, China – is one of two halves. Data from FE Analytics reveals Russia and Brazil have fared less well than China and India. In the past 12 months to June 21 2016, the MSCI India index has made a 15 per cent gain, followed closely upwards by the MSCI China index, up 9.5 per cent.

But the MSCI Russia index is down 36.3 per cent and Brazil is deep into negative territory at -47.6 per cent following a period of political turmoil.

The recent underperformance of emerging Asia is probably best seen in terms of the Chinese economic slowdown Xiaoyu Liu, Aviva Investors

James Dowey, chief economist at Neptune Investment Management, recalls between December 31 2000 and December 31 2010, an equal-weighted basket of the four Bric stockmarkets returned 370 per cent, “amid great confidence around the world in the fundamentals underpinning these returns”.

He adds: “Yet five years later, the Bric giants have spent much of the interim in disarray, buffeted by political and financial crises, while their stockmarkets have heavily underperformed those of the West.”

Mr Lueth believes India has been the standout performer – not just of the Bric economies but the wider emerging market universe.

He says: “I think people were initially very excited when [prime minister Narendra] Modi came into power. [India also] had a very strong central bank governor. I think that excitement has gone because a lot of the structural reforms people had hoped for are more difficult to push through because they don’t have a majority in parliament.”

He continues: “Despite that, it’s still a safe haven in emerging markets, so I think India stands out as having done particularly well.”

Xiaoyu Liu, fund manager, Asia Pacific equities at Aviva Investors, turns to the recent underperformance of the MSCI Emerging Asia index, compared with the MSCI Developed Asia index.

Ms Liu explains: “Although over the last 15 years, MSCI Emerging Asia has outperformed the developed MSCI World index significantly, it is noticeable that, recently, investors have not been so clearly rewarded for the higher level of risk associated with investing in these emerging countries.

“The recent underperformance of emerging Asia is probably best seen in terms of the Chinese economic slowdown, although currency depreciation and weaker global trade have played a part.”

For those deterred from investing in emerging markets due to the asset class’s disappointing performance, the lure of an income stream could help emerging markets return to investors’ portfolios.

Omar Negyal, manager of the JPMorgan Global Emerging Markets Income investment trust, points out: “Dividend yields across emerging markets are reaching levels that will excite income investors, as the MSCI EM index now yields more than 3 per cent.

“It is certainly the case that emerging markets continue to raise countless concerns for international investors, such as the China-led slowdown, which included a collapse in many commodity prices, weakness in EM currencies and disappointing earnings. But these fears have also contributed to very cheap valuations: at 1.4 times price-to-book ratio on the MSCI EM index, a level at which long-term investors have historically been rewarded for investing.”

Mr Negyal concludes: “For investors willing to stomach the risk of emerging markets in hopes of experiencing the gains – after all, we’re talking about an asset class that represents 85 per cent of the world’s population and 50 per cent of the world’s GDP – the presence of a dividend income stream can go some way to softening the risk profile.”

Ellie Duncan is deputy features editor at Investment Adviser