Portfolios of energy, emerging markets and China stocks have been by the far the best performing funds in the Investment Association universe since the Black Monday sell-off six weeks ago, according to research by FE Trustnet.
On 24 August investors jettisoned stocks around the world, causing the biggest one-day fall in markets since 2011 with billions of pounds wiped off global markets in what was swiftly dubbed ‘Black Monday’.
According to FE Analytics, most equity markets have only partially recovered from the more general sell-off that had been taking place since April, which was sparked by worry about slowing Chinese growth and accelerated on Black Monday when China devalued its currency.
Performance of indices since 10 April 2015
Source: FE Analytics
The best performing portfolio is the $404m Schroder ISF Global Energy fund (see table overleaf) which has posted a hefty 20.2 per cent return since the trough on Black Monday.
It is not the only energy fund to make the list of the funds rallying. The next best performer is the £200m Guinness Global Energy fund, which has returned 17 per cent since. By comparison the MSCI World index is up just 7.59 per cent
Performance of funds and index since 25 August 2015
Source: FE Analytics
Energy stocks, and by extension the funds that primarily invest in them such as these two, have been heavily out of favour since the oil price started to plummet to $45 per barrel last year, losing about 40 per cent of value. Today it is priced at around $51 per barrel.
Source: FE Analytics
The manager of the second highest returning fund, Tim Guinness, recently said in a video interview with FE Trustnet that he is expecting oil to bottom out at some point in the next 12 months and that there could be significant upside for certain parts of the energy and oil & gas market as a result.
“Let’s go back to 1998, which is the most recent and comparable period to this, and the place to put your bets at the bottom was the service sector,” Guinness said.
“The service sector tends to get massacred on the way down and every month that goes by it is getting cheaper and cheaper. However, timing the bottom is difficult,” he added.
Chris Taylor, head of research at Neptune Investment Management, disagrees. He thinks the oil price will be low for a while, forecasting it to stay below $50 a barrel for “decade or two”.
“The oil price has more than halved over the past 18 months. Many market participants assume this is a temporary phenomenon. We believe they are wrong,” he said.
“Our analysis of the changes taking place in the real world suggests the oil industry is adapting to life with an oil price that will not return to its old equilibrium for a decade or two. This is the result of a massive but largely unheralded improvement in shale resource extraction techniques.”
Emerging market stocks, particularly emanating from China and Asia, are the other dominant force in the 10 best portfolios since Black Monday.
The likes of Jupiter China, Baring China, Marlborough Emerging Markets, Tiburon Taipan, Allianz China Equity, HSBC GIF Chinese Equity and Marlborough Far East Growth have all made at least 14 per cent return in the weeks since 24 August.
However, no China-specific funds is in positive territory over six months and not one member of the IA Global Emerging Markets sector is in positive territory over the past year.
This due to several years of underperformance against developed markets as well as the large falls seen the bubble burst on the mainland China domestic ‘A’ shares market, which rallied 220 per cent before plummeting 50 per cent since April.
Performance of sector and index since June 2014
Source: FE Analytics
These depressed levels have started to prompt bargain hunters. One such investor is Schroders’ Marcus Brookes (pictured), who heads up Schroders multi-manager range and recently told FE Trustnet that he was slowly reallocating back to the area.
“We recently took a small step into emerging markets for the first time in a long while, though that is not to say we are becoming bullish on the area yet,” he said.
The investment management team at wealth manager Canaccord Genuity thinks China is starting to look attractive again after setback, saying: “In all probability [it] will prove to be a much needed period of consolidation in a long-term bull market.”
However, the team reminds investors that the 35 per cent correction in the A share index should be seen in the context of its 154 per cent rise over the past year. It adds that there are still “good investment opportunities” in emerging markets through funds that stay away from China’s “volatile” domestic stock market.
“Whilst our mindset therefore is to look for opportunities to move our equity weighting to at least neutral from our present underweight, we are not going to rush at it,” the team said.
Canaccord Genuity points out that the most usual occurrence after a significant market reversal is a “relief rally” that can recoup some if not all of the losses. However, this usually fails and the market is forced to retest its previous low.
“After this, a second rally occurs and this rally is usually of some duration and substance. This process which is happening now can take a month or two to occur and we are therefore looking very carefully at appropriate entry levels for an increase in equity exposure,” the analysts added.
However, not all are so keen to catch the bounce back. JP Morgan Asset Management chief strategist Stephanie Flanders said there will be more bad news ahead for emerging markets in general.
“If you look at emerging markets they are probably cheap but we think it is going to get a lot cheaper before it becomes something you want to buy,” she said.