Introduction
In response, the Chinese government stepped in with controversial trading restrictions. Amid this increased volatility, emerging market portfolio managers have struggled to deliver steady returns.
In the year to September 7, FE Analytics shows that the Investment Association Global Emerging Markets sector, comprising 84 funds, generated an average 21.8 per cent loss – and that the MSCI Emerging Markets index has lagged every other major regional index in the past 12 months. Its data shows that the MSCI Emerging Markets index lost 22.3 per cent in the year to September 7. Hong Kong’s Hang Seng index was down 10 per cent.
Globally, the best-performing regional index in the past year has been the Nikkei 225, which made a 7.1 per cent gain, followed by the S&P 500, up 4.4 per cent in spite of the global market rout in August.
Jan Dehn, head of research at Ashmore, says: “Emerging market (EM) economies are coping with a raft of external headwinds at the moment, including capital outflows, lower commodity prices and negative risk sentiment... These factors matter at the margin, but they are not enough to create a crisis for the asset class.”
Asset prices have weakened far more than is justified by the fundamentals, says Mr Dehn.
Figures from the Investment Association show the Global Emerging Markets sector saw net retail sales outflows of £46m in July, while the China/Greater China sector outflows topped £60m. The Global Emerging Markets sector also recorded outflows in May.
Mr Dehn says: “The gravitational pull of the quantitative easing-sponsored developed markets is sucking capital from EM. The bubble valuations in developed markets are therefore a mirror image of the excessively cheap valuations in EM. Asset prices have long ago lost touch with reality and could continue to do so for some time.
“However, investors must always bear in mind that the key to returns over the full cycle is not how EM is priced relative to developed markets, but how each and every asset is priced relative to the underlying fundamentals of its specific issuer.” On this basis, he adds, emerging markets offer value, while developed markets are potentially overvalued.
F&C’s multi-manager team, co-headed by Rob Burdett and Gary Potter, notes: “The view seems to be that the slowdown in emerging markets will derail economic growth in the US, UK/Europe and Japan. Clearly there will be an impact on exporters and commodities stocks, but those low commodity prices, notably oil, will continue to be a tailwind for Japan and Europe.
“The deflationary forces of lower commodity prices will also allow developed markets’ central banks to keep interest rates lower for longer.”
The pair add: “Global growth will obviously be impacted by a slowing China and emerging markets, but unless growth collapses, some markets may well have oversold in the short term, with the caveat that they may fall further yet.”
THE PICKS
First State Global Emerging Markets Leaders
Jonathan Asante and Ashish Swarup’s £2.6bn fund invests in large and mid-sized companies, generally with stockmarket values of $1bn (£640m) and above. FE Analytics reveals the fund returned 190 per cent to investors over the 10 years to September 8. It is a fairly concentrated portfolio of 56 holdings, with Unilever, Tiger Brands and Standard Bank Group among its top 10. India makes up 23.5 per cent of the fund. Mr Asante also manages the First State Global Emerging Markets fund, which has generated a stellar long-term performance too.
Baillie Gifford Emerging Markets Growth
This £462m fund has produced an impressive performance over the longer term, although returns have suffered more recently. FE Analytics shows in the 10 years to September 8, it generated a return of 112.1 per cent. Co-managers Richard Sneller and Mike Gush have a preference for growth and take a five-year perspective. Launched in March 1997, the fund was in the Investment Adviser 100 Club this year and last. According to the factsheet, the portfolio has a 31 per cent weighting to China. Its top three holdings are Dragon Oil, Samsung Electronics and Tencent Holdings.
EDITOR’S PICK
Hermes Global Emerging Markets
Gary Greenberg’s £368m fund is an Investment Adviser 100 Club 2015 member for the second consecutive year. He invests for long-term capital appreciation and in spite of headwinds returned a solid 10.6 per cent over three years to September 8, according to FE Analytics, making it one of the best-performing emerging markets funds over the period. Mr Greenberg has 27.3 per cent of his portfolio in China, with India accounting for 17.2 per cent and Taiwan 14.8 per cent. His largest sector allocation is to information technology at 27.7 per cent, the factsheet reveals.
