Over the past ten years, developed markets have been the place to be. Buoyed by a runaway US and technology boom, they have returned 205%* compared to a mere 69.3%* for emerging markets.
But is all that about to change? Over the past six months, the two markets are neck-and-neck in terms of performance and, over the past one and three months, emerging markets have been stronger*.
We garner the opinions of five emerging market fund managers on the outlook for their asset class and where they are finding opportunities.
“The first half of the year was difficult for emerging markets, with only China and Taiwan in positive territory^, but the second quarter – from April through to the end of June – markets experienced a healthy recovery.
“Latin American countries actually did best over the three months: Argentina was the top performer bouncing almost 45%. South Africa, the Czech Republic, Indonesia and Thailand made up the rest of the top five^^.
“On a sector basis, healthcare unsurprisingly has been the star performer, while defensive consumer staples, utilities, financials and real estate have been weaker^^.
“Portions of China’s domestic economy are rapidly getting back to normal. Its proactive politics are also helping to give its economic recovery some momentum. Trade wars, in our opinion, will just result in China becoming more self-sufficient in terms of technology and the stimulus currently going to its infrastructure, technology and manufacturing should spill over to other emerging markets, with Latin America benefitting from rising commodity prices, for example.
“Eastern Europe is benefitting from the fact that wider Europe is coming together in a way that could mean that, over the next couple of years, the European Union will grow faster than the United States. Europe has come out of the pandemic earlier and seems to be coping better. This exerts a pull on some of the countries in Eastern Europe, as the EU is its biggest trading partner.
“The other important aspect for income investors is that while there are risks to emerging market dividends on a company level, what we're not seeing is the regulatory interventions where banks, for example, across Europe, the US, and the UK have been instructed not to pay dividends.”
Kunjal has a preference for Asian companies:
“Asia has a lot going for it: a sizeable and growing middle class, a long history of reform and investment in both physical and digital infrastructure. And when infrastructure spending happens, there is efficiency and productivity and these economies can grow a lot faster than those that are not prioritising infrastructure. And that's why Asia has become a very relevant part of the emerging market benchmark and our investment universe.
“In contrast, if you look at emerging Europe, the Middle East, Africa (EMEA) and Latin America, while these regions do have some very strong capabilities, especially in terms of resources, as the world moves ahead in a low carbon economy, the resource intensiveness is going to decline.
“And unfortunately for Latin American and for EMEA they haven’t really benefited or made very good use of the upside that they had for many years from rising commodity prices – they haven’t invested in infrastructure. They also don't have a sizeable middle class population. Inequality is very high, so you either have rich or poor, and the pace of reforms has been very sluggish. So that's why we tend to find more opportunities in Asia as opposed to other emerging regions.
“That said, we do see a few structural drivers emerging in those areas. Healthcare is one example, e-commerce and fintech are others. So, there will be some pockets of opportunities that will open up.”
Talking in more detail about Latin America, Devan Kaloo said:
“Latin America has struggled this year due to both its pandemic response and a low oil price. It’s recovery is starting to come through though and there are some longer-term themes that could play into its favour. The deglobalisation of supply chains, for example, could benefit Mexico as the US in particular looks to move operations away from Asia and bring them back closer to home.
“Environmental, social and governance factors (ESG) are also an opportunity. Investors putting money into Latin America are increasingly thinking about ESG, so companies with better ESG standards are doing better. This has the knock-on effect of encouraging other companies that want to attract capital adopt more ESG-friendly behaviour. This is all at the same time as governments are pushing greener infrastructure programmes.”
Devan spoke more about this in his recent video interview:
Daire also believes there are environmental opportunities in emerging markets:
“According to World Bank estimates, 75% of the cost of climate change will accrue to people in emerging markets – mainly because most are situated close to the equator so there is increased physical risks from climate change. Also, regulations are changing, so ideally, investors want to be in areas with tailwinds like renewable energy.
“Emerging market economic growth projections are still better than those of developed markets. The demographics are better too, as emerging markets have 85% of the world population and 90% of world population growth, along with a huge working age population and dynamism in the financials sector.
“Valuations are also good, policy making in general has been supportive and economic stability has improved. It’s not so much the developed markets have outperformed emerging markets in recent years but more that the US has outperformed.”
Ian believes that foreign investors are missing a trick by shunning emerging markets:
“Foreign investor flows in emerging markets have been negative in every single week of 2020, but there has been an impressive increase in domestic participation in markets, especially in Brazil, Russia, Turkey and Korea, supporting the argument that markets everywhere are being driven by local investors.
“One increasingly powerful argument for equity allocations is that emerging market central banks are continued to cut interest rates and we are now seeing emerging markets offering real negative yields. This has not gone unnoticed by emerging market savers witnessing record low interest rates on their cash savings accounts.
“All of this will be supportive of valuations, even while may foreign investors are focused on matching the NASDAQs returns.”
*Source: FE Analytics, total returns in sterling for MSCI Emerging markets index and MSCI World Index to 23 July 2020
^Source: Guinness Asset Management, Bloomberg, total returns in sterling for MSCI indexes, 1 January to 30 June 2020
^^Source: Guinness Asset Management, Bloomberg, total returns in sterling for MSCI indexes, 1 April to 30 June 2020
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. The views expressed are those of the author and managers quoted and do not constitute financial advice.