Hold tight for the ultimate rollercoaster ride... in emerging markets

THRILL-SEEKERS must be delighted that theme parks have reopened. But those who like investing and are looking for a rollercoaster ride should eye up opportunities in emerging markets such as China, India and Brazil.

Equities across these have recovered dramatically from the initial coronavirus hit. According to investment house Lazard: ‘The Covid-19 chapter of the 2020 book certainly isn’t finished yet, but the fall and recovery in emerging markets equities has been a very sharp V.’

It says: ‘As we enter the third quarter, we have identified several catalysts that would point to an uptick in global growth, which would in turn indicate the potential for a further rerating.’ But with the spread of coronavirus continuing in many developing economies and strained tensions between China and the UK, China and the US and now the UK and Russia, is investing in emerging markets too much of a risky proposition?

Most investment experts believe that in the short term, world economic recovery is likely to be led by China and other Asian nations.

Jason Hollands, a director of wealth manager Tilney, says: ‘Asia was the first region to experience the pandemic and the first to come out of lockdown.

‘While developed market economies are predicted to contract by around 5.6 per cent this year, the equivalent contraction in emerging economies is expected to be around 1.6 per cent, followed by 6.5 per cent growth next year. Furthermore, a key positive from an investment point of view is that equity prices in emerging markets look reasonable compared to developed markets.’

So, shares that comprise the MSCI Emerging Markets Index – the benchmark for emerging markets – currently trade at around 14 times the forecast earnings for the year ahead. By way of comparison, this compares to 19 times for global equities overall and nearly 22 times for the tech-heavy US S&P500 Index. In other words, emerging market shares are trading at a discount to shares on developed markets.

A potential spoiler is what happens with Covid-19 further down the line – especially the possible impact of a second wave. Infection rates in emerging economies remain a big concern and are running particularly high in Latin America, most notably Brazil.

Ayesha Akbar is a multi-asset portfolio manager at Fidelity International. She says: ‘While the coronavirus response has varied across emerging market economies, with some countries and regions handling it well (Vietnam, South East Asia), and others struggling (Brazil, India), lockdowns have now eased and economic activity has resumed. As long as recovery doesn’t stall, I expect emerging market assets to continue to do well.’

Emma Wall, head of investment analysis at Hargreaves Lansdown, says: ‘Looking at historical valuations, emerging markets look good value right now and there are plenty of benefits that they can offer a portfolio. With economic growth comes investment opportunities, and the chance for UK investors to add diversification to home-grown investments.

‘There are world leaders to be found in emerging markets across all sectors; technology, consumer staples, pharmaceuticals and auto manufacturers. Often, they are on cheaper valuations than their developed market peers.’

Ben Yearsley, a director of Shore Financial Planning, is a buyer of emerging markets. ‘Yes, they are riskier,’ he says, ‘but generally such markets are cheaper than developed markets and they offer better growth potential.’

Yearsley recently topped up his personal holdings in emerging market funds with the purchase of shares in investment trust JPM Emerging Markets. He likes the idea of pairing a stake in a general emerging markets fund with a holding in a specialist fund such as Matthews China Small Companies which aims to find the next Tencent or Alibaba-style success story.

Teodor Dilov, at wealth manager Interactive Investor, also rates JPM Emerging Markets as well as M&G Emerging Markets Bond fund managed by Claudia Calich.