Asia and emerging market equities stage a come back

While all eyes have been on the US stock market and the performance of the big tech companies, Asia and emerging markets have been staging a come-back.

In the third quarter of this year (30 June to 30 September) both asset classes outperformed their developed market peers*. Asian equities in particular have not only had a strong three months, but also a strong year.

So far in 2020, the MSCI AC Asia ex Japan index has returned 12.65%** in sterling terms – some 3% more than the S&P 500. Over the third quarter it returned 5.8%*, while the MSCI Emerging Markets index returned 4.7%*. In comparison, the S&P 500 was up 3.7%, the Japanese TOPIX up 2.6%* and the MSCI Europe ex UK up 1.2%*. The FTSE All Share continued to fall, posting negative returns of 2.9%*.

Which countries have done best?

When you break down the performance, China, India, Korea and Taiwan are the countries that have done best – their stock markets are up some 5%-10% over the three months***. Indeed, the Chinese market has hit a record high, due to a massive surge in Chinese retail investors buying into the market.

Australia, Hong Kong, Indonesia, Malaysia, New Zealand, Singapore, Thailand, Latin American and Emerging Europe all posted negative returns***.

Which sectors have done best?

In terms of sectors, consumer discretionary, consumer staples, technology and materials were the industries doing well in the third quarter***. Tech hardware has benefited from increased demand for computers to work from home and data centres continue to grow exponentially.

Both Taiwan Semiconductor Manufacturing Company and Samsung are big weights in the index and have recovered very well. Chinese tech stocks like Alibaba, JD.com and Tencent, which are also big constituents, have also been good performers, helping drive the market higher as COVID-19 accelerates online adoption.

Can Asia and emerging markets continue to outperform?

Asia and emerging markets generally have younger populations than the West, which should be more resilient to the pandemic. Longer term, there are some structural themes which are positive too.

Edmund Harriss, co-manager of Guinness Asian Equity Income fund, says that inter-regional demand is picking up, China is increasing domestic development of its pillar industries, so it is less dependent on the West, and the middle classes and the consumer continue to grow, as does 5G technology.

That said, there is still the potential for increasing tension between the USA and China, as China grows stronger and increasingly rivals the US economically. It is possible that Asian and emerging market investors could end up as collateral damage in some scenarios. As ever, a balanced and well diversified portfolio may well be key to making the most of opportunities and limiting the impact of negative external events.

Top ten Asian and emerging market Elite Rated funds in the third quarter

*Source: FE Analytics, total returns in sterling, 30 June 2020 to 30 September 2020
**Source: FE Analytics, total returns in sterling, 31 December 2019 to 14 October 2020
***Source: Guinness Asset Management, Bloomberg, total return for MSCI Indices show in GBP