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Global Emerging Markets sector investment review

Emerging markets have experienced diverging fortunes over the past year. We take a look at how funds focused on this varied area on our Preferred List have fared.

| 14 min read

Emerging markets are in the process of transitioning from a lower income, less developed economies towards modern, industrial ones with a higher standard of living and typically more engagement on the global stage.

Some rely on exporting goods to developed economies, a prime example being China. Although it is transitioning to greater domestic consumer-driven growth, which is already the case in India. Others such as Brazil are rich in commodities and natural resources.

Rapid industrialisation, growing populations and increasing wealth can mean plentiful opportunities for investors in emerging markets. However, the risks are also often significantly greater, and economic expansion or population growth do not necessarily translate to strong stock market performance.

An earlier stage of development can mean less stringent market and government regulations. Share prices can also fluctuate rapidly or to extreme highs and lows due to there being fewer investors buying and selling. There may also be greater political risks and of government intervention in a company. Finally, emerging market currencies can also be subject to significant fluctuations, which can work for or against investors.

Options for investing in emerging markets

Funds investing in the region have different areas of focus:

  • Global Emerging Markets – Funds with broad exposure to emerging economies with China and India usually foremost, but with additional exposure to areas such as Latin America, Eastern Europe and South East Asia. Typically, they encompass China, India, South Korea, Brazil, Mexico, South Africa, and Taiwan, though arguably South Korea or Taiwan have already fully ‘emerged’ into developed markets.
  • Single country / region – These funds mainly focus on individual countries, such as India or China, or regions such as Latin America.
  • Frontier markets – An even more specialist strategy of investing in stock markets that are less established than those in emerging markets. They are at a very early stage, much smaller and less accessible, with fewer companies to invest in. They will also typically be high risk countries, sometimes with increased danger of political unrest.

As emerging countries are quite different from each other, and each one as a high level of risk, this sector can be home to both the best and worst-performing stock markets at any given time. That’s why a diversified approach of a broader emerging market fund can make sense. Other funds could then be added to a portfolio for extra exposure to a particular theme, area, or country as desired.

As with most sectors, investors have the choice of buying a passive investment, which aims to replicate the performance of a market index before charges, or backing an active manager who will attempt to maximise returns and beat the index.

The passive constituents on our Preferred Fundlist are Fidelity Index Emerging Markets and iShares Core MSCI EM IMI UCITS ETF. The former is a fund that aims to track the MSCI Emerging Markets index, while the latter is designed to replicate returns from the less widely used MSCI Emerging Markets Investable Market Index, which includes a weighting in smaller companies. At certain times this could give it a slight edge in terms of performance, and at others it may detract from returns.

Emerging markets is an area where we think it is worth considering active funds. The less mature nature of many of the markets and the relative lack of in-depth analysis being conducted on companies by the financial community tends to result in more opportunities for active managers to capitalise on. In developing countries there is also typically less stringent governance, so an active manager can also add value by avoiding the problem companies or, in certain cases, those most adversely impacted by the political or regulatory landscape. Some emerging markets contain significant numbers of companies that are partly state-owned and don’t always prioritise shareholder returns, so avoiding these can also add value over time.

Active funds will vary significantly from one another, so investors need to ensure they are happy with the philosophy of the manager and the mix of geographical exposures in the fund before investing. Given the differences in geographical make-up, as well as the assortment of varying investment styles, it is normal to see wide divergences in performance.

Recent performance of emerging markets investments

2022 was a difficult year for many emerging markets with a combination of slowing growth, rising interest rates and a strong US dollar posing challenges.

China finally began dialling back its strict zero COVID-19 approach, but economic recovery has since stalled with authorities now promising measures to boost consumer spending, improve access to funding for businesses and support the property industry. Although there are signs of stabilisation, consumer sentiment continues to weaken, partly due to turmoil in the real estate market, which is causing people to hoard savings.

Meanwhile, India has been the standout performer over both 2022 and 2023 so far with investors attracted to its growth prospects despite more expensive valuations. Latin America, has also been a fruitful area for investors as Brazil benefited from buoyant commodity prices and a healthier than expected economic picture, partly fuelled by bountiful agricultural harvests, and Mexico has benefitted from increasing US trade as supply chains, notably in pharmaceutical and technology industries, have been reconfigured closer to home.

Frontier markets performed particularly well, with some countries also benefitting from the de-globalisation trend which is seeing US and Chinese companies looking for third parties such as Indonesia with whom to trade.

Overall across the sector, a ‘value’ approach of seeking out shares with lower valuations met with success compared to funds that prioritise growth. This was partly down to the more value-orientated strategies avoiding the large Chinese e-commerce companies.

Here's how the actively-managed funds in the Global Emerging Markets sector on our Preferred List got on over the past year, as well as in previous periods, with commentary on each fund detailed below, although please note that past performance is not a reliable indicator of future returns.

Performance of broad Global Emerging Markets funds on our Preferred List

Past performance is not a reliable indicator of future returns. Figures are calculated in £ on a % total return, bid to bid price basis with net income reinvested; Source: FE Analytics, data to 30/09/23

Performance of specialist and single country Global Emerging Markets funds on our Preferred List

Past performance is not a reliable indicator of future returns. Figures are calculated in £ on a % total return, bid to bid price basis with net income reinvested; Source: FE Analytics, data to 30/09/23

* This index is provided here to provide context only and is not a direct comparison. This Trust uses a bespoke benchmark comprising frontier and emerging markets outside the largest eight economies in the MSCI Emerging Markets Index.

Broad Global Emerging Markets investments to consider

1. JPM Emerging Markets Income

      This fund has a good record of keeping up with its emerging markets benchmark while delivering an income to investors. Emerging markets offer diversification for income hunters, and the discipline of seeking out cash-rich companies capable of growing their dividends can help provide some stability in what is a riskier sector to invest in.

      The fund has held up relatively well in what has been a turbulent period for emerging markets, despite having relatively little exposure to the strong-performing Indian market. Avoiding the non-dividend payers in the Chinese market in particular has helped. The management team are starting to warm up to South Korea, where the dividend culture is said to be improving.

      2. Lazard Emerging Markets

        Manager James Donald can draw upon his many experiences during a track record spanning over two decades as well as a broad and well-resourced team. The fund adopts a patient and strict ‘value’ approach, buying into shares in unloved companies at a significant discount to their true worth. However, Mr Donald’s philosophy could be better summed up as ‘quality at a discount’. He and his team seek out stocks exhibiting high and sustainable profitability, but that trade at attractive valuations relative to peers or their own history.

        Like many value-based methodologies the fund has struggled to keep pace with markets for much of the past decade, but it has more recently come into its own with its valuation and quality disciplines rewarded. South American exposure contributed to this, with a lower inflationary environment and the potential for declining interest rates piquing investor interest in the region. Notably, energy stock performance helped the fund’s exposure to Brazil and Columbia. Meanwhile, a relative lack of Chinese exposure assisted overall versus the index.

        3. Templeton Emerging Markets Trust

        At £2bn Templeton Emerging Markets is the largest emerging markets investment trust by some distance and has a long history. Launched in 1989, it was once overseen by the emerging markets pioneer Mark Mobius and is now managed by Chetan Sehgal and Andrew Ness alongside a team with considerable industry experience. Well diversified by country and sector, it is an investment trust option for ‘core’ emerging market exposure.

        The managers believe their long-term view allows them to look beyond short-term news, noise, and emotion and identify emerging markets companies whose prospects in terms of future earnings power are not fully understood by the market and thus not accurately captured in their current valuations.

        Long-term themes across the portfolio are ‘premium’ consumer goods, digitalisation, healthcare and technology. The trust is also very much focused on the ‘big getting bigger’, evidenced by the top ten holdings in ‘mega-caps’ including Taiwan Semiconductor, Alibaba and Samsung. The Trust has gradually closed its Chinese underweight in recent months by adding to existing holdings.

        Specialist Emerging Market investments to consider

        1. BlackRock Frontier Markets IT

        BlackRock Frontiers Trust invests across emerging and frontier markets, excluding the largest countries that dominate the typical emerging markets portfolio. The differentiated investment universe means it offers diversification benefits when held alongside a typical emerging markets fund or a tracker, though the two would tend to be more correlated during periods of market stress.

        Accessing this higher risk area through an investment trust is advantageous. The structure frees up the managers from the headache of managing daily flows, especially important when investing in the often illiquid stocks of these nascent markets. Frontier markets tend to be heavily influenced by capital flows and currency swings. Large deficits can presage weakening currencies, political instability, economic slowdowns and crisis conditions. Significant political, governance and liquidity risks are recurring features.

        The BlackRock team are experienced specialists at looking at these markets, not just looking in detail about companies but considering the stability of the political and legal systems at a national level, alongside central bank policy and other internal factors. We regard the scale and resource of the team as a significant advantage. Presently, they are excited about opportunities in some of the Gulf states and in Indonesia.

        2. FSSA Greater China Growth

        Run by the highly regarded Martin Lau, this fund harnesses a long-established and successful process looking for high quality, well-managed companies in mainland China and the surrounding area. There is a strong emphasis on long term investment decisions and capital preservation, though it is inevitably a region where stock market volatility can be very high.

        The manager’s focus is firmly on stock selection rather than looking at the economic picture, and a detailed assessment of a company’s balance sheet and management is a priority. Companies with sustainable business models, predictable earnings and compelling valuations are actively sought.

        We believe the fund represents a strong candidate for those looking to invest in this higher risk and specialist area for the longer term. Sentiment towards China has been pessimistic as many investors spooked by government interventions and by poor long-term returns from Chinese equities, but this fund has managed to hold up relatively well in recent years by focusing on strong companies with shareholder-friendly policies, as well as using the full extent of its mandate to invest in opportunities in Taiwan and Hong Kong.

        3. Goldman Sachs India Equity Portfolio

        This specialist fund invests in India companies with perceived strong or improving fundamentals when they are trading at a substantial discount to their intrinsic value. Given the potential to exploit inefficiencies, the fund will be structurally overweight in medium-sized and smaller companies versus the index.

        Historically, stock selection has been the dominant driver of returns rather than sector or style factors, and we would expect this to be the case going forward with the team under manager Hiran Dasani having built a strong record. The fund enjoyed a small outperformance during the review period, although past performance is not a reliable indicator of future returns. From the start of 2023, stock selection in IT has been helpful alongside an overweight position in HDFC Bank, the largest bank in India by market capitalisation, also contributed. The management team remain excited by the long-term opportunity India offers, highlighting supportive trends such as demographics, underappreciated smaller companies and growing domestic consumption.

        Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

        Investment ideas

        If you are looking for investments to fill a gap in your portfolio our Preferred List could help. This collection of investments is chosen by our Research Team to represent our best ideas across the major sectors.

        See more

        Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.

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