More than 85 per cent of emerging market and frontier funds have failed to beat cash in the two years since markets sold off in the so-called ‘taper tantrum’ of 2013, according to research from FE Trustnet.
Markets sold off strongly, particularly emerging and frontier markets, in May 2013 when then Federal Reserve chairman Ben Bernanke gave a hint that he would look to wind up the central bank’s huge quantitative easing (QE) programme sooner rather than later, a move that was implemented six months later.
According to FE Analytics, the MSCI Emerging Markets index is down since the sell-off having made two brief visits into positive territory over this period. The MSCI Frontier Markets has been more volatile but has gained more ground since the sell-off and is currently up 11.66 per cent.
Performance of indices since Taper Tantrum
Source: FE Analytics
Just 12 of the 81 emerging or frontier markets funds have returned more than the best fixed-term cash individual savings account available in May 2013, which would have bagged a 6.22 per cent return over this period.
The average fund in the IA Global Emerging Markets sector lost 2.63 per cent. Two-thirds of funds are down over this period.
The best performer was the $464.1m Templeton Emerging Markets Smaller Companies fund, run by Mark Mobius which returned 20.67 per cent. Carmignac Emerging Discovery follows with a 17.17 per cent return.
Performance of fnds, sector and index since taper tantrum
Source: FE Analytics
Next best was the Hermes Global Emerging Markets, Carmignac Emergents, JPM Emerging Markets Small Cap and JOHCM Global Emerging Markets Opportunities funds, which all posted double-digit gains.
The worst performer is the FP HEXAM Global Emerging Markets fund, managed by Bryan Collings, having lost 21.44 per cent. The next worse is another of Mobius’s funds – Templeton Global Emerging Markets, which has lost 17.09 per cent.
Performance of funds, sector and index since Taper Tantrum
Source: FE Analytics
As well as making up the largest proportion of the MSCI Emerging Markets index at 25 per cent, China has been one of the best performing parts of the emerging world of late due to a boom in equity markets following financial liberalisation of share ownership and an increasingly easy monetary policy by China’s central bank.
Given this significant gain in a quarter of the index, as well as the prospect of an interest rate rise in the US looming, investors may well find emerging markets could be in for another fall if rates rise quickly from their historically low base, according to Anna Stupnytska, economist at Fidelity Worldwide Investment.
“The taper tantrum of 2013 and the bund rout of late have given us a flavour of the type of market reaction we can expect if US interest rate rises occur more quickly than expected. Given the size of positions and liquidity issues in certain markets, the potential for outsized market moves would pose serious risks to global growth,” she said.
“Indeed, with the Fed hike looming on the horizon, emerging market vulnerabilities related to external imbalances are likely to surface. The usual suspects are particularly exposed: Turkey, South Africa and Brazil among others.”
Russ Koesterich, BlackRock’s global chief investment strategist, disagrees, believing an early rate hike does not bode ill but could still ruffle the market’s feathers – although not to the extent Bernanke’s largely unexpected and easily- misunderstood wake-up call did in 2013.
“Although stocks have clearly benefited from the Fed’s languid path to an initial rate hike, the market’s luck may not last. A fall rate hike is likely, particularly after April’s consumer inflation report,” he said.
“An autumn rate hike by the Fed and the resultant modestly higher rates are unlikely to be a catastrophe for markets. Rates will be rising from a historically low level, the pace of future hikes will be measured and bull markets rarely end with a first rate hike.”
“Still, lift-off by the Fed would mean that the safety blanket of ultra-accommodative monetary policy starts to be removed. And as the market demonstrated in the spring of 2013, investors’ reaction to losing their safety blanket is roughly the same as most toddlers: A tantrum may, at least temporarily, ensue.”
Several fund manager have been allocating away from emerging markets recently, including Ben Conway, fund manager at Hawksmoor, who slashed his exposure to the sector earlier in the year due to the prospect of an interest rate rise in the US and the resulting dollar strength.
“We’ve had the view that the dollar would strengthen. While we had liked emerging markets funds from a valuation standpoint, the fact that the dollar and emerging market equities have been negatively correlated in the past meant we started to reduce our position.”
He added: “There has been nothing since then to suggest that wasn’t the right decision.”