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Don’t wait for the UK to bounce back – emerging markets are already on the road to recovery
TALK of a bounce back from the economic devastation wreaked by Covid- 19 may feel a little premature in the UK. We are still in the midst of it all. But some countries are enjoying the first signs of recovery. So-called emerging market economies have started to see strong growth and many investment experts believe they present good long-term opportunities for investors.
Sam Dickens, portfolio manager at IG Index, is one of them. He points out that since stock markets plunged last March, an index of the biggest companies in emerging markets has outperformed US companies by close to 17 per cent.
‘This could be just the start of a longer period of relative outperformance for emerging market equities,’ he says.
Andrew Lister, who runs the Aberdeen Emerging Markets fund, agrees. He says there has been an ‘ uptick in interest in emerging markets in a big way’. He adds: ‘People have had to rethink their perceptions due to the handling of the pandemic.’
SO WHAT EXACTLY DOES ‘EMERGING MARKET’ MEAN?
LIKE many labels put on our investments, the term ‘ emerging market’ i s one of convenience that conceals a huge spectrum of markets.
Economist Antoine van Agtmael coined the term 40 years ago to avoid putting the less- attractive label ‘ third world’ on an investment fund.
But many countries given this l abel certainly don’t fit the third world stereotype – and there’s a huge gulf between their economic performances over the past year. Countries as diverse as South Korea, China, Brazil, Mexico, Thailand, Vietnam and South Africa are all seen as emerging markets.
But South Korea and China, famed for their swift and technology-heavy handling of the pandemic, look worlds away from Brazil and Mexico, which have been hit hard.
BUT AREN’T THEY A MORE RISKY INVESTMENT?
INVESTING in emerging markets is generally seen as riskier than developed markets.
While many are enjoying rapid growth, it hasn’t always been this way. In the two years in the run-up to the pandemic, emerging market equities did not perform well.
In the two years to last March, whil e t he S& P I ndex 5 0 0 (a barometer of the health of big US corporates) rose more than 39 per cent, emerging markets generated a return of just three per cent – a performance t hat IG I ndex’s Dickens describes as ‘dismal’.
Russ Mould is investment director at fund platform AJ Bell. He says: ‘The old joke goes that an emerging market is one from which investors cannot emerge unscathed when things go wrong – as they inevitably will, according to the sceptics.’
But Dickens believes investors are ‘likely to be compensated for this additional risk over the longrun with higher returns’.
WHICH COUNTRIES ARE DOING WELL NOW?
THE economies of emerging markets have escaped lightly compared with more developed peers, figures from the International Monetary
Fund suggest. They saw economic growth fall by 3.3 per cent last year on average, compared with close to a six per cent drop in advanced economies.
But t his year, t he IMF says emerging market economies should rebound by six per cent, with India,
China and South-East Asia ahead with eight per cent growth.
Chetan Sehgal, lead portfolio manager of investment trust Templeton Emerging Markets, says the vaccine-led recovery should see many emerging market companies come out in a stronger and more competitive position. He says: ‘This broadening of economic recovery creates a compelling investment opportunity for all types of investors across emerging markets as a whole.’
Michael O’Brien, portfolio manager of Fundsmith Emerging Equities Trust, is also positive about prospects. He says: ‘Investors are looking for alternatives to developed world stock markets and feel a lot more comfortable with emerging markets given the Biden election win, which is likely to ease trade tensions and Trump’s protectionist stance.’
COUNTRIES TO WATCH OUT FOR IN THE COMING YEAR
AS THE emerging markets sector is so broad, national economies within it are likely to perform very differently in the next year.
While China and South Korea are currently riding high, investment experts are confident that some of the harder-hit emerging economies are poised for recovery.
Dickens says: ‘Large nations such as Indonesia and Brazil will become increasingly influential on the global stage, potentially edging out some of the weaker European economies.’
Sehgal predicts that Taiwan and South Korea will continue to benefit from the structural growth in information technology hardware, as well as the diversification of global technology supply chains.
Juliet Schooling-Latter, research director at investment scrutineer FundCalibre, believes investing in India could be a sound option.
‘ It has good demographics – a young workforce – stable politics, and a huge amount of potential,’ she says.
She is convinced that countries in South-East Asia such as Indonesia, Vietnam, Philippines and Thailand also offer exciting, long-term potential. ‘Like India, they have a young
workforce and a growing middle class. But political risk is always a potential problem,’ she warns.
CHOOSING FUNDS FROM EMERGING MARKETS
ONE of the easiest – and best – ways to gain exposure to the vast and diverse emerging markets world is to invest in a fund run by a specialist manager who can balance the different economic stages and recovery plans of emerging market economies.
Dzmitry Lipski, head of fund research at fund platform Interactive Investor, likes Mobius Investment Trust, which focuses on companies with good environmental, social and governance records in emerging and frontier ( less developed than emerging) markets. He also recommends Fidelity Index Emerging Markets fund, a cheap option for investors in terms of charges. It tracks the performance of the MSCI Emerging Markets Index, comprising 1,300 firms.
It has generated a return of 25 per cent over the past six months. ‘With an ongoing charge of 0.2 per cent, it is one of the lowest cost emerging markets funds,’ says Lipski.
Ryan Hughes, head of active portfolios at investment platform AJ Bell, speaks well of Fidelity Emerging Markets – actively rather than passively managed like its index counterpart.
He says: ‘It has large exposure to China, while South Korea, India and Taiwan also feature heavily. It has big positions in technology companies such as Taiwan Semiconductors, Samsung and Alibaba.’
PICKING ONE COUNTRY... OR EVEN ONE SECTOR
SINCE t he emerging markets sector covers so many disparate countries and businesses, some investors may prefer to put their money in emerging markets funds with a particular focus. James Carthew, head of investment trusts at research company QuotedData, believes a Latin America fund could help investors benefit from a bounce back in the region.
‘There, vaccination programmes could spur a sharp economic recovery,’ he says. ‘Regional funds such as Aberdeen Latin American I ncome and BlackRock Latin American Income could have a better year.’
Aberdeen’s Lat i n American Income fund yields over five per cent and the BlackRock fund 4.6 per cent. In Asia, he picks Aberdeen New Thai, which has been under pressure due to the impact on the Thai economy of a lack of tourism. ‘The fall in visitor numbers has had a depressing effect. But the country’s economy could turn around this year.’
Rather than specific countries, some emerging markets funds focus on particular sectors. Omar Negyal, manager of JP Morgan Global Emerging Markets Income, spotlights three sectors. ‘Our key income ideas are in technology, consumer staples and financials,’ he says.
HOW MUCH SHOULD I PUT INTO EMERGING MARKETS?
TEODOR Dilov, fund analyst at investment platform Interactive Investor, says investors should have between 10 and 15 per cent of their investments in emerging markets.
However, a certain portion of the assets managed by global funds and global investment trusts are exposed to emerging markets, so investors with holdings in these vehicles may not need to invest in an emerging markets fund.