Aberdeen Emerging Markets Equity, Lazard Emerging Markets and Stewart Investors Global Emerging Markets Leaders are among the funds making double-digit gains in the opening months of 2016 as emerging market equities have come bouncing back from their recent run of underperformance.
Until very recently, developed market equities had been the place to be as they were the main beneficiaries of the liquidity-driven market rally that came about after the global financial crisis. As the graph below shows, the developed market-focused MSCI World index has risen more than 50 per cent over the past five years while the MSCI Emerging Markets index is down over 10 per cent.
Performance of indices over 5yrs
Source: FE Analytics
However, 2016 to date has seen somewhat of a reversal of fortunes for the two indices after the prices of several key commodities – which some emerging markets export – started to rise. The MSCI Emerging Markets index is up 6.93 per cent (it had advanced more than 10 per cent, but has lost some ground in recent weeks) while the MSCI World has gained just 1.85 per cent.
Some experts expect emerging markets’ relative outperformance to run for longer if the outlook for China’s economic health continues to improve and as this part of the market is trading on more attractive valuations.
Macroeconomic forecasting consultancy Capital Economics said: “Emerging market equities have outperformed those in developed markets in the past three months. We think the support to emerging market equities from rising commodity prices may now begin to fade, but better news from China should ensure that they still perform well.”
“Valuations still do not look unattractive. Admittedly, the rally in the past three months has now left price/12-month forward earnings ratios above their five-year average in most countries. However, that is probably only because analysts’ forecasts for corporate earnings have yet to catch up with an improving outlook. And in any case, that measure of valuation remains far more attractive than it does for developed markets.”
This outperformance of emerging markets at an index level is reflected in the Investment Association’s fund sectors: IA Global Emerging Markets is the third best performing peer group over the year to date with an average return of 6.69 per cent. It’s only beaten by IA Global Emerging Market Bond with a 9.85 per cent average gain and IA Specialist, where the average fund (out of a very mixed bag) is up 7.61 per cent.
When it comes to individual funds, those focused on Latin America – such as HSBC GIF Brazil Equity, BNY Mellon Brazil Equity and Aberdeen Latin American Equity – have fared the best thanks the strong surge in Brazilian equities. However, most investors will have opted for global emerging markets exposure rather than holding specialist regional funds so we’ve looked for the best performers from the IA Global Emerging Markets sector.
Source: FE Analytics
The leading fund is one that is likely to be off the radar for most investors: FP Henderson Rowe FTSE RAFI Emerging Markets. The £94.6m fund tracks the FTSE RAFI Emerging Markets index, which comprises of the top 350 companies, as measured by fundamental value, in 14 primary emerging markets.
Its near-term surge comes after fourth-quartile returns in 2012, 2013, 2014 and 2015, however. A similar picture can be seen with the second best performer – NFU Mutual Global Emerging Markets – as it sat in the peer group’s bottom quartile in each of the past three calendar years and is third quartile over five years with a 13 per cent fall.
Other funds on the list have fared better during recent years. Aberdeen Global Emerging Markets Smaller Companies and Aberdeen Emerging Markets Equity are the only two to be in positive territory over five years, making total returns of 17.83 per cent and 6.77 per cent respectively.
Legg Mason IF QS Emerging Markets Equity, Lazard Emerging Markets and F&C Emerging Markets are also outperforming their average peer over five years as well as the MSCI Emerging Markets index, which has shed 10.18 per cent over the period.
In all, 20 emerging market funds have made double-digit gains over 2016 so far as have the popular Stewart Investors Global Emerging Markets and Stewart Investors Global Emerging Markets Leaders, which now reside in the IA Specialist sector.
Only two portfolios have lost money: Baillie Gifford Emerging Markets Growth, which is down 3.05 per cent, and Neptune Emerging Markets, which has fallen 2.5 per cent.
One area of the emerging markets space that has been significant losses, however, is China. The IA China/Greater China sector is worst performing peer group over the year to date with an average loss of 4.59 per cent. Just three funds out of 36 have made money but the leader – Templeton China – is only up 0.68 per cent.
Some members of the sector have lost more than 10 per cent while several more have fallen over 5 per cent, as the table below shows.
Source: FE Analytics