Emerging market funds with a focus on China and Brazil have handed UK investors the largest returns in the 100 or so days since the country’s historic vote to quit the European Union, FE data shows.
While UK stocks tanked in the immediate aftermath of the referendum, they have rallied over the summer thanks to monetary stimulus from the Bank of England and the positive impact of a weaker sterling on the country’s larger, international-facing companies.
FE Analytics shows the FTSE All Share has risen 9.12 per cent since 23 June, lagging the performance – in sterling terms - of other major indices such as the S&P 500 (up 16.58 per cent), the Nikkei 225 (up 21.33 per cent) and the MSCI Emerging Markets index (up 25.92 per cent).
Much of these gains, however, have been down to the weak pound boosting foreign returns for sterling-based investors. If we look at the above four indices in local currencies, then the FTSE All Share tops the list.
Performance of indices since 23 Jun 2016 in local currency
Source: FE Analytics
But when it comes to individual funds, improving sentiment towards emerging markets and the flattering effect of weak sterling means that a clear trend emerges – those with a focus on investing in emerging market equities sit firmly at the top of the table.
As the table on the following page shows, BNY Mellon Brazil Equity has made the best total return since 23 June after gaining 40.99 per cent. Another two Brazilian equity funds are in the list of the top 25 performers; both have made more than 30 per cent in sterling terms.
This comes after a tough time for Brazil stocks, however. Over five years, BNY Mellon Brazil Equity – which is managed by Brazilian investment specialist ARX Investimentos – has outperformed its MSCI Brazil 10/40 benchmark by more than 1.5 percentage points but is still sitting on a 0.16 per cent loss.
Source: FE Analytics
Brazilian equities have achieved strong returns this year as the country’s exporters benefitted from rallying commodity prices. There are signs that the worst of its recession is coming to an end and it is hoped that new president Michel Temer will push through foreign investor-friendly reforms.
Adrien Pichoud, chief economist at SYZ Asset Management, said: “The Brazilian economy showed some signs of improvement in the last few months. Industrial production increased this summer after two years of nearly non-stop decline. Consumer and industrial confidence are continuing to edge higher and the IMF recently revised up its projection for 2017 GDP for a modest expansion of +0.5 per cent (vs. nil growth before).”
“On the political front, the senate officially voted to impeach Dilma Rousseff following the corruption scandal in the Brazilian government. This will allow Temer’s more pro-business government to begin the expected reforms that are needed. On the monetary policy side, the BCB is turning more dovish which suggests a possible easing cycle in the coming months.”
However, whether this run will continue into 2017 is far from clear as Pichoud added: “Ultimately, the performance of the Brazilian economy and its stock market next year will largely depend on the evolution and implementation of the most important reforms.”
But it is China funds that dominate the best performers since Brexit with 19 of the 25 on the previous list focusing on the stock market of the world’s second largest economy.
Old Mutual Henderson China Opportunities is in second place overall with a 36.35 per cent sterling total return, followed by Julius Baer Multistock China Evolution (36.25 per cent), Henderson China Opportunities (36.18 per cent), Henderson Horizon China (35.25 per cent) and Schroder ISF Greater China (35.15 per cent).
Performance of indices since 23 Jun 2016
Source: FE Analytics
As the chart above shows, the returns of the Shanghai Composite have been broadly in line with those of the developed market-focused MSCI World index. However, the MSCI China index – which is used as the benchmark of many IA China/Greater China funds – has risen 33.33 per cent.
While confidence has been returning to emerging markets, not all are convinced that the time is right to buy into China.
Jason Hollands, managing director of Tilney Bestinvest, said: “There are some clear and worrying similarities between where China stands today and that of Japan in the early nineties: its demographic profile is set to deteriorate, equity valuations are high and its private sector debt build-up has been rapid. China represents a key systemic risk to global markets, more so than Brexit ever did in our view.”