Should investors rethink emerging markets?
This article first appeared in Investment Life & Pensions Moneyfacts Magazine, September edition...
The past decade or so has been disappointing for emerging market investors. While world stock markets have returned almost 220%* over the last 10 years, emerging markets have returned just 70.5%*.
The two largest markets in the developing world have done better than the average, with China returning just shy of 118%* and India returning 174%*. But those investing in Latin America have seen their pot of money grow just 1% in a whole decade*!
So, it’s perhaps unsurprising that the asset class is under-loved and undervalued today.
The International Monetary Fund forecasts that economic output across emerging markets will expand by 3.8% this year and 4.4% in 2023**. Both figures have been revised down sharply since last year – but there is hope, as these figures are still comfortably ahead of those for advanced economies.
And with the threat of Covid starting to fade, the benefit of rising commodity prices and the move to a new economic cycle where US equity market performance may not be as stellar as it has been in the past 10 years – could emerging markets finally present an opportunity to investors?
Here, Mike Sell, manager of Alquity Indian Subcontinent fund and head of emerging markets at Alquity, gives us a brief run down on the outlook for various emerging regions.
“Inflation is still surging in Europe,” said Mike. “Eastern Europe is already aggressively raising interest rates despite the risks to growth from energy supply disruptions. I believe the continent will slip into recession along with the UK.”
“Latin America has been the beneficiary of higher commodity prices but, in my view, political risk is a more important consideration.” Mike said. “Brazil has an election in October, and it will be polarised. Mexico is rolling back market reforms. Chile has a constitution referendum in November and its president being impeached (again). Colombia still has polarised politics.”
“High commodity prices (coal and iron ore in particular) benefit South Africa where ESG is also stronger,” said Mike. “But structural constraints (political corruption and lack of reforms) are hampering long term growth. There are mounting inflation pressures and other areas of Africa are vulnerable to food supply issues and currency crises.”
“On a more positive note, the Middle East to me is not just a ‘safe haven’ at the moment, but there is a structural story here too,” Mike said. “The high oil price is beneficial, and the Saudi economy is growing at its fastest pace in 10 years. Demographics are also among the most favourable in emerging markets (stronger even than India), there is scope to boost tourism, amd very low household debt.”
“Have we reached the turning point in China? I believe we have,” said Mike. “Economic stimulus has started with a 0.1% interest rate cut, the doubling of the bank lending quota for smaller companies, infrastructure investment, tax cuts and rebates, and cuts in mortgage rates. The zero-covid policy has also been tweaked to reduce disruption, so we’ll have micro lockdowns instead of whole cities.
“Economic numbers for the second quarter of the year won’t be great, but we should then start to see sequential improvement month after month. To me, the bad news is already in the price and the country is ripe for a domestic upswing.”
“I expect GDP growth to remain robust in India,” said Mike. “Exports are on a structural uptrend (up 24% YTD), there are good demographics, stable politics and the monsoons are looking ok which is positive for inflation.
“There continue to be some lower income segment some issues – on the ground research from our Foundation suggests this segment of the population has not recovered from covid in terms of their savings being depleted. The higher oil price has also added to inflation and will weigh on consumption. But valuations have corrected and while the stock market remains at a premium to history, I think this is justified given the structural improvements.”
“Indonesia’s economic recovery is being supported by high commodity prices and on-going reforms and it’s finally bouncing back from a very long covid wave. Inflation was still well-contained at 3.6% in May,” said Mike.
“Bangladesh has long term structural drivers including demographics and rapid urbanisation- just like India,” Mike continued. “Vietnam has also emerged as a key manufacturing base in the Asian region and is enjoying foreign direct investment inflows.”
“Overall, I believe we are entering a positive environment for emerging markets,” concluded Mike. “Valuations are compelling for the asset class and China will very much be the catalyst for a turn in fortunes.”
This is a concentrated fund focusing on small and medium-sized companies across global emerging markets. It can also invest in frontier markets should opportunities arise.
The largest country weightings in this fund are Taiwan (19.1%) and India (18.7%)^. These are followed by Korea at 15.5% and China at 15.2% with smaller allocations to South Africa, Mexico, Brazil, Chile, Malaysia, and Peru^.
This fund invests in 40-45 large and medium-sized companies in emerging markets. Manager Rasmus Nemmoe has an absolute return mindset and looks for quality companies that can demonstrate sustained and predictable growth over the long-term.
This fund currently has 29.6% invested in Chinese companies, 27.7% in Indian firms and 9.2% allocated to Mexican businesses^. Other holdings are listed in South Korea, Hong Kong, Argentina, Peru, Taiwan and Egypt^.
This is a concentrated portfolio of high-quality companies with durable earnings. The emphasis is on future quality, rather than companies which have simply done well historically.
India is the fund’s highest country allocation currently at 22.3%*. This is followed by Brazil (18.9%), China (17.3%), the US (7.1%) and South Korea (4.3%)^. Holdings are also listed in France, Taiwan, The Netherlands, Mexico and Hong Kong^.
This fund invests in companies offering products and services to the upwardly mobile, ambitious, and aspirational population centres which account for over 70% of the world’s growth. Preferred areas include the travel, education, healthcare and e-commerce sectors, and there is a focus on firms which either have dominant or first-mover advantage.
The largest country weightings are India (36.5%) and China (34.7%)^. There are also holdings in companies listed in Poland, Indonesia, Vietnam, South Korea, Taiwan, Thailand, Singapore, and Mexico^.
Launched in 1991 and backed by one of the largest emerging market research teams, this trust has been run by manager Austin Forey for more than two decades.
China is currently the largest country weighting at 23.5% followed by India (19.7%), Taiwan (13.5%) and Hong Kong (8.3%)^. There are also allocations to South Africa, Korea, Indonesia, Brazil, Mexico, and Argentina^.
*Source: FE fundinfo, total returns in sterling, using MSCI indices, 10 years to 4 July 2022
**Source: IMF World Economic Outlook – April 2022
^Source: fund factsheet, 31 May 2022