Emerging markets: the wallflower at the stock exchange party

Investors seem to have abandoned emerging markets but is this justified? Darius McDermott, managing director of Chelsea Financial Services, believes 2017 could be the year that this view changes.

Emerging markets: the wallflower at the stock exchange party

Developed markets have been having a whale of a time lately. No matter what we seem to throw their way, they just continue to climb and the party rages on. The US and UK stock markets, in particular, are reaching new highs every day. Or that’s how it feels anyway.

The same can’t be said for emerging markets, which have been a wallflower for the past five years or so. Investors have all but abandoned them. This is evidenced particularly well in ISA sales last month, where the best-selling global emerging markets fund is languishing in 95th spot*!

2016: back on the guest list?

That this asset class is so unloved right now surprised me. Particularly as last year seemed to mark something of a turnaround.

With the help of a lot of government stimulus, China’s economy stabilised and the bad news flow took a breather. Oil prices recovered from their disastrous lows and we had a changing of the political guard in Brazil. These factors, along with better global growth and a touch of inflation, all combined to leave the asset class in a much better place. Even Trump’s election couldn’t spoil the party, and stock markets ended the year on a high.

As always with such a diverse region, there were winners and losers. Brazil and Russia were the best performers, up 98% and 84%** respectively, in the 2016 calendar year. Peru, South Africa and Taiwan also did well. Mexico bore the brunt of concerns over Trump’s protectionist policies and his obsession with building a wall. Turkey’s coup and the general state of their finances didn’t help their market, and India’s removal of bank notes from what is still a cash-dominated society caused a ‘bit of a commotion’ for a few weeks.

But all in all it was a good 12 months and, for the first time since 2012, emerging markets outperformed developed markets.

2017: life and soul of future returns?

Fund managers in this area are reporting an overall improvement in company fundamentals, positive steps in companies’ capital discipline and a focus on profitability, as well as returning money to shareholders. This is a marked change from corporate behaviour in the boom years, when profitability was basically destroyed by excess capacity and compressing margins.

With valuations still looking attractive, managers are finally feeling more positive about the prospects for their asset class and I have to agree. If I have learned one thing in my almost 20 years in this industry, it is that it is easier to make money when you buy something that is cheap. There are still risks but that is always the case with this asset class. It certainly doesn’t deserve to be so far down the ‘favourites’ list.

As with all emergent things in life, tomorrow’s winners in emerging markets will not be the ones we see today. I really believe that active management is the best way to go when investing in this asset class.

My favourite funds in this sector include Charlemagne Emerging Markets Dividend, Lazard Emerging Markets and M&G Global Emerging Markets. If you are looking for a single region or country fund option,  Aberdeen Latin American Equity, First State Greater China Growth and GSAM India Equity Opportunities are all worth a look.

 

*Source: Chelsea Financial Services ISA client investments, February 2017

**Source: FE Analytics, 31st December 2016, total returns in sterling.

 

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice. Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest. 

 

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