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29th April 2015

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Darius McDermott, Managing Director

The experience of the major emerging market indices - the BRICs - since the global financial crisis has been divergent to say the least.

Post-crisis Russia had been growing strongly on the back of its resource-intensive economy, with strong demand for oil and industrial metals, most notably from China. Indeed, it appeared the Russian market was back on track in 2011 until the Chinese economy started a slow and gradual decline.

Then Putin's increasingly bellicose mood caused further market jitters until, finally, the Ukraine flashpoint sent the rouble and RTS [Russian Trading System] tumbling. There has since been a bounce, 18.4% since the start of the year, but investors should be wary of false dawns.


It has been a different story in India, where Narendra Modi became Prime Minister in May 2014.

He led the Bharatiya Janata Party (BJP) to an outright majority in the Indian parliament, the first time this has been achieved since 1984. From this secure platform, Modi hopes to emulate the success he had as chief minister of Gujarat state across the whole of India.

Overcoming the embedded bureaucracy will not be easy, but he has made a promising start and the Bombay Sensex is up 134% over six years - only marginally behind the S&P 500 in sterling terms.

Modi's first annual budget has signalled BJP's clear intent to foster business growth. This is also bolstered by the innovative ‘Make in India' campaign, which is striving to create a new breed of best-in-class manufacturing businesses across India. The challenge of course will be to balance the weight of public expectation with political and economic reality. Over the long-term we believe the reforms will have a positive effect, so we think there may be more to go for the Indian stock market.


The management of the ‘Middle Kingdom' has played a pretty good hand at its version of capitalism, and China is currently the main driver of global growth in terms of GDP. No one is quite sure what the number for that series really is, but China is definitely growing - and, with a burgeoning middle class, the country will eventually succeed in reducing their reliance on exports.

The Shanghai Composite has languished for most of the period since 2009 despite strong growth numbers, but now that the economy is slowing, the market has picked up and has risen nearly 50% over the period. This serves as a useful example of the tenuous link between stock markets and GDP. Chinese stocks are up 26.6% since the start of the year.

China is beginning to move from an export-driven economy to a more domestic-based one. There are huge challenges, but reforms could make it a better prospect for investors over the long term as the Chinese stock market becomes more investor-friendly in terms of share buy-backs and dividends, and the growing middle class continues to consume.

Market liberalisation indicates investors are at the forefront of policymakers' thinking. Invesco Perpetual Hong Kong and China is our preferred Elite rated fund here.


Brazil has faced plenty of criticism recently over its ineffective policies, which have led to a worrying slowdown in the economy.

It is unclear if re-elected President Dilma Rousseff can address the endemic problems the nation faces - she and her government have already lost voters' confidence. The recent Petrobas scandal highlights the scale of the problems the country faces. A demand for commodities initially helped the economy but, like Russia, Brazil too has succumbed to falling oil and metal prices.

The strength of the US dollar has also had a bearing on emerging markets. While a depreciating currency can be an advantage in as much as it makes exports more competitive, it also makes imports more expensive, driving up inflation and increasing the cost of dollar-denominated debt.

The latter point is likely to be a matter of some concern if dollar strength continues. There is a strong correlation between a rising US dollar and falling emerging equity markets, although its manifestation is often delayed. If the dollar has had its run then we expect emerging markets to have another significant period of outperformance, but volatility will also return.

Trying to assess Russia as an investment case is more difficult. Russia is cheap - but then, cheap doesn't necessarily equate to value. The rouble has also plummeted in value, giving investors the potential for a double kicker if stocks are to come back.

The problem lies, of course, in Putin's approach to foreign policy and whether he plans another iron curtain. Russia has bounced, but it remains a speculative rather than a considered investment.

Funds to consider

Barring Brazil (which has shown modest relative stock market returns), the BRICs have roared since the beginning of the year.

They are attracting attention on a relative valuation basis and some of the front runners have been attracting significant flows. These include Lazard Emerging Markets and M&G Global Emerging Markets.

Two relative newcomers also gaining popularity are the PFS Somerset Emerging Markets Dividend Growth fund and the Charlemagne Magna Emerging Markets Dividend fund. The Charlemagne fund is led by Mark Bickford-Smith, an experienced manager with a background of thorough analysis, who understands the stocks researched.

One fund hitting our radar is the Hermes Global Emerging Markets fund, run by Gary Greenberg. This is a generalist emerging market vehicle that focuses on how sustainable companies can benefit from long-term structural change in emerging markets, such as we are seeing in India. This fund has performed strongly this year, powered by overweights in India and China.

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Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’ views are his own and do not constitute financial advice.