Snapshot – Emerging Markets: Tide may be turning for EMs

In the year to June 13, the MSCI Emerging Markets index has underperformed other markets by some way, delivering 5.36 per cent compared to the 12.74 per cent returned by the MSCI World index and 13.13 per cent by the S&P 500 over the same period, according to FE Analytics.

Across three years, the MSCI EM index is outperformed by the MSCI’s North America, Europe and World indices.

Net retail sales of the IMA Global Emerging Markets sector have also struggled since April last year, when the sector saw inflows of £145m. For four consecutive months from November 2013 the sector recorded outflows but net retail sales have since picked up with inflows of £10m and £21m in March and April 2014, respectively.

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Although investors have been steering clear of emerging markets, the tide could be about to turn.

Jeremy Roberts, head of UK retail sales at BlackRock, believes the asset class will come back into favour this year. He explains: “Emerging markets are set to be a key investment theme in the second half of 2014, as advisers intend to increase their clients’ allocations significantly to this asset class.”

Mr Roberts cites a survey of 63 London-based wealth managers and financial advisers at BlackRock’s London Investment Conference 2014. Of those asked, 73 per cent say they anticipate increasing their clients’ exposure to Asian equities, while three in five plan to raise allocations to emerging market equities.

Clearly, advisers still see opportunities in the emerging market countries.

A recent exchange-traded (ETF) fund launch suggests the consumer growth story in the region continues to play out. The iShares MSCI Emerging Markets Consumer Growth UCITS ETF has been launched to capture opportunities “arising from evolving spending patterns” by emerging market consumers. The portfolio will invest in developed and emerging market companies.

The case for investing in emerging market equities has received a further boost in terms of valuations.

Russ Koesterich, BlackRock’s global chief investment strategist, suggests that with developed market equities getting more expensive, emerging market equities are looking better value.

He says: “Valuations for both the S&P 500 index and the MSCI World ex USA index of developed markets are now trading at four-year highs. Stocks are beginning to look expensive.”

Mr Koesterich suggests that Japan and the emerging markets are bucking this trend, though. “For their part, EMs look reasonably priced, trading at a discount to their post-crisis and long-term averages,” he notes.

But Barclays Wealth and Investment Management remain neutral on emerging markets equities, warning they are “structurally attractive but tactically still vulnerable to local concerns and Fed tapering”.

Ellie Duncan is deputy features editor at Investment Adviser