How to navigate emerging markets in times of strife

RISING tensions between North Korea and the US have left investors feeling cautious about the prospects for emerging markets, but these growing economies have far outpaced developed stock markets this year and experts say it’s time to buy.

The term ‘emerging markets’ refers to 24 developing countries across the globe including Brazil, Russia, India and China.

An investment in this index would have returned a hefty 25.8pc so far this year, compared to just 13.7pc from the developed markets index, which includes the US and UK.

Young, growing populations which are becoming wealthier, political reforms and improving corporate governance are all helping to drive the improving prospects of these countries – but they come with their fair share of problems, too, and investors need to tread with caution.

Brazil has been mired in a corruption scandal which has seen its previous president impeached while the economy in Venezuela is so bad – it’s in the midst of its worst-ever recession – that its government has stopped issuing economic figures.

Meanwhile, in Asia, there are concerns about rising debt levels and a slowing economy in China, not to mention the tensions between North Korea and the US.

But that’s not putting off Mark Williams, who manages the Liontrust Asian Income fund, which has returned 86.6pc over the past five years. He has been investing more money in South Korea, where firms have been raising their dividends.

Gary Greenberg, head of emerging markets at Hermes Investment Management, is backing banks in Russia, China, Peru and Brazil.

He also likes cash-generative technology businesses such as Chinese internet companies Tencent and Alibaba and says Taiwan is a ‘hotbed of technological innovation’. The Hermes Global Emerging Markets fund is up 105.4pc over five years.

Nick Price, manager of the Fidelity Emerging Markets fund, is looking to tap into the trend towards health and wellness in countries where the population is becoming richer.

Price, whose fund has returned 81.8pc over five years, says Chinese dairy companies Mengniu and Yili have seen a rise in demand, while South African insurer Discovery has seen increased interest in its Vitality lifestyle insurance programme.

Greenberg says many of the businesses are not dependent on the fortunes of the country in which they are headquartered.

Hong-Kong-based data firm Techtronic, for example, gets all of its revenues from outside China while Korea-based Samsung Electronics generates more than half of its sales in the US and Europe. Greenberg adds: ‘But we have to assess whether factors affecting a country can negate the appeal of a company.’

Emerging markets have been strong this year and there are signs this outperformance could continue. Brazil is introducing measures to stop corruption, Argentina is looking to pass a law to stop local governments overspending and China is tightening regulation on banks.

JANDehn, head of research at Ashmore Group, says: ‘Growth is accelerating in most emerging countries, inflation is at the lowest level on record, interest rates are falling and equities are outpacing those in developed markets. It has been an excellent year for emerging markets.’

After years of being out of favour, the attitude is changing as the risk of a slowdown in China seems less likely and low interest rates in the US and Europe force people to look further afield for investments.

Juliet Schooling Latter, research director at Fund Calibre, says: ‘ We think emerging markets are a good long-term investment. The North Korea situation is a worry and could have an impact on stock markets in Asia in the short-term but if that situation is resolved then South Korea looks a good place to invest as corporate governance improves.

‘I also favour India, which has great demographics, an entrepreneurial society and a president who is keen to make needed reforms.’

She likes the Charlemagne Magna Emerging Market Dividend fund, which has almost a quarter of its £300m of assets invested in Chinese firms such as casino group Sands China and China Construction Bank. The fund is up 58.8pc in five years.

She also likes the Stewart Investors Asia Pacific Leaders fund, which has almost a third of its £9.3bn in assets invested in Indian businesses such as Tata Consultancy and Kotak Mahindra Bank. It has returned 73.7pc in the last five years.