Play the long game in emerging markets
Investment returns from emerging markets have hardly been covered in glory over recent years with many investors nursing significant losses. In 2015, the MSCI Emerging Market index, which tracks stock markets across developing nations, bombed by 10% and over the past three years it is off by 21%.
However, one school of thought argues that those of an intrepid disposition, prepared to buckle up for the long run, should view this as a buying opportunity, given that the sector is so out of favour.
Putting losses into perspective
China, the world’s biggest emerging market and widely viewed as a major driver of the global economic engine, has been at the centre of the trouble. Economic slowdown and transition in the world’s second largest economy, the US, has hit it, and its emerging market neighbours, chiefly as a result of slowing Chinese demand for commodities and lower trade activities.
However, while China’s economic growth rate pulled back last year, it still grew by 6.9%, compared with 7.3% a year earlier. As such, it is hardly slouching: according to the last official tally, it was growing at an annual rate of 2.1%.
Emerging markets, after all, are nations whose economies are growing at a faster pace than advanced economic countries such as Britain or the US. They are typically experiencing rapid industrialisation and are characterised by a young, growing workforce and a rising middle class.
The world’s primary emerging markets include Brazil, Russia, India and China, collectively referred to as the ‘BRICs’. Together, they account for a massive 40% of the world’s population and house an abundance of natural resources.
As they grow and prosper it is anticipated consumer spending will rocket, which will in turn deliver ever-stronger investment returns.
What's gone wrong?
The poor performance across emerging markets has been in the wake of a combination of factors.
For one, the price of commodities, most notably oil, has continued to fall dramatically. The upshot of this has been that many commodity-dependent developing market companies have fallen in value.
In addition, higher interest rates in the US, as well as a stronger dollar, have been particularly hard for natural-resources-reliant countries, as commodities are largely priced in US dollars so are negatively impacted by the more robust currency. Most emerging market companies tend to borrow in US dollars too, so that an increase in the dollar’s value, means a higher level of debt.
This backdrop has been exacerbated by the usual factors that tend to characterise emerging markets, namely political risks, sub-standard infrastructure and poorer levels of corporate governance.
But despite the current woes engulfing the sector, some believe the long-term case for investing remains.
The thesis backing the investment case asserts that ultimately growth across emerging markets continues to beat that in the Western world, and economic prospects should benefit from greater domestic consumption over time.
However, investors need to be prepared to tolerate some extreme market swings. Taking a short-term bet could be like trying to catch a falling knife, so investors need to be ready for a long-term commitment.
Patience could prove lucrative, though, given that over the past 15 years, the MSCI Emerging Markets index has risen by 180%.
David Coombs, head of multi-asset investments at fund manager Rathbones, expects there will be more pain to come but he believes the “long-term story remains”.
Four emerging markets funds to consider
Size: £130m; launch date: May 2012. Reasons to invest: Patrick Connolly, a certified financial planner at Chase de Vere, highlights that the fund’s manager Alistair Way has a lot of flexibility as he is not limited to investing minimum amounts in any country or sector.The portfolio has investments across a wide range of countries including China, Korea, Mexico and Thailand.
Size: £188m; launch date: March 2006. Reasons to invest: Managed by Irina Miklavchich, the fund has investments in countries such as the Philippines, Russia and India. Gavin Haynes, managing director at Whitechurch Securities, says: “Threadneedle has a well-resourced, experienced team focusing on well-managed companies with sustainable business models.”
Size: £260m; launch date: July 2012. Reasons to invest: Adrian Lowcock, head of investing at Axa Wealth, recommends this fund for yield-hungry investors. He says: “Its manager Richard Titherington runs a flexible income fund and will invest in both defensive and higher-risk stocks.
This ability to tilt the portfolio helps the manager deliver strong performance while maintaining a high yield.”Taiwan and South Africa count among its bigger bets.
Size: £708m, launch date: 1997. Reasons to invest: Managed by James Donald, the fund has investments across, among others,Taiwan, China, Korea and India. Darius McDermott, managing director of fund broker Chelsea Financial Services, says: “The manager employs a strong value investment* discipline, which has led to this being one of the stand-out funds in its sector.”
* Value investors actively seek stocks of companies that they believe the market has undervalued.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.