Thailand has been the best performing emerging markets during the post-global financial crisis era, delivering a double-digit annualised return over the past 10 years, according to research by FE Trustnet.
This week, FE Trustnet will set its sights on the emerging markets with a five-part series focusing on the region.
Over the next five days, we will cover topics including the region’s best active funds, we'll consider the broader emerging market themes currently playing out, and speak with FE Alpha Manager Gary Greenberg.
First up, FE Trustnet breaks down the emerging markets into the 24 countries that make up the MSCI Emerging Markets index and takes a look at the performance of the individual indices over the past 10 years.
In this study, we calculated the discrete annual returns between 2008-2017 to see which emerging market countries have performed the best over the past decade.
For consistency purposes all figures mentioned in this article have been calculated in sterling terms and any fund allocations to different regions mentioned are current allocations and do not mean the fund has had the same allocation throughout the 10 years studied.
The most-consistent performer of the emerging market countries in the past decade is Thailand, which has delivered an annualised performance of 17.81 per cent since the beginning of 2008.
Cumulatively, it is also the best-performer out of the 24 indices and has a 10-year total return of 253.37 per cent to the end of 2017.
Several factors have contributed to Thailand’s strong performance over the past 10 years, according to John Malloy, co-head of the emerging and frontier market equity team at RWC Partners.
Performance of MSCI countries
Source: FE Analytics
Firstly, Thailand’s foreign exchange has remained stable over the past decade because the country runs a large current account surplus, he explained.
Most of the emerging markets (excluding China) on the other hand, have, on average, seen foreign exchange declines of around 40 per cent since the financial crisis.
Malloy added that Thai corporates have been good on the whole with conservative policies and a focus on sustainable performance.
“The two major reasons for this are: a) in 1997-98 Thailand did not save bankrupt institutions and this has created conservatism in most companies of not growing via extreme leverage; and, b) with so much noise on politics and domestic uncertainty, the businesses are built to withstand downturns,” he said.
“In general, we find quality and strategy of Thai corporates better than the rest of ASEAN [Association of Southeast Asian Nations].”
Finally, the manager said that Thailand’s performance has been very broad-based with no stand-out companies alongside a stable macroeconomic environment with steady growth.
It is worth mentioning Thailand’s military coup and rule thereafter in 2006-7 caused the country to miss out on the big emerging markets rally that saw most of the region’s markets double. Therefore, the starting point for Thailand in this study was lower than the rest of emerging markets.
One fund that has benefitted from the strong gains of Thailand in the past decade is the closed-ended fund Aberdeen New Thai Investment Trust, which allocates 98.5 per cent to the country.
Performance of trust vs sector over 10yrs
Source: FE Analytics
Although its shorter-term results have been less impressive with bottom-quartile returns over one, three and five years, the trust is testament to long-term investment and over 10 years is up 308.56 per cent, which makes it the best-performing fund in the IT Country Specialist: Asia Pacific sector.
The fund with the next highest exposure to Thailand is Barings ASEAN Frontiers (27.60 per cent).
Since its launch in 2011, the $404.4m fund has struggled to match the performance of its average IA Asia Pacific ex Japan peer and has returned 55.87 per cent, 6.54 per cent less than its peers.
However, it has outperformed the MSCI AC ASEAN index, which was up 47.92 per cent over the period.
The next top-performing country was Peru, with the MSCI Peru index delivering an average annualised return of 15.87 per cent and the fourth-best cumulative performance of 150.08 per cent: MSCI Philippines (197.97 per cent) and MSCI Taiwan (152.80 per cent) were second and third for this metric.
The fund with the highest exposure in the Investment Association to Peru is Templeton Latin America, with 7.48 per cent of the portfolio held in Peruvian stocks.
It hasn’t fared as well as its benchmark index, however, having returned just 15.23 per cent over the 10 years between 2008-2017. MSCI Emerging Markets Latin America has gained 24.38 per cent over the period.
Third place for the emerging market country with the best annual returns is MSCI Indonesia, which had an average return of 15.44 per cent between 2008-2017.
The fund with the highest allocation to the country is the previously-mentioned Barings ASEAN Frontiers, which has around a quarter of the fund invested in the region.
Moving down the list, the BRIC (Brazil, Russia, India and China) countries, with the exception of Russia, found themselves around the middle of the list.
India ranked 11th out of the 24 indices for annualised returns (10.76 per cent), Brazil was 12th with 9.53 per cent and China close behind in 13th place with 9.50 per cent.
RWC’s Malloy said that China’s performance relative to the rest of the emerging market countries can be attributed to the fact that the constituent members of the MSCI Emerging Markets index have changed since the early 2000s.
“On its accession to the World Trade Organisation in 2001, China was in a period of rapid urbanisations as peasants moved from farm to factory,” he said.
“The government invested a huge amount in infrastructure development and the country reaped one-off productivity gains from this transition.
“In the last few years, China has embarked on a different growth profile related to innovation, a scalable scientific base of universities and engineers and a massive rise in military spending.”
Therefore, he said the largest members of the index have changed from oil and construction companies in the early 2000s to technology and internet companies.
Indeed, the four largest constituents of the MSCI Emerging Markets index sit in the information technology sector: Tencent, Samsung, Taiwan Semiconductor Manufacturing and Alibaba.
Malloy said this has created more potential for alpha – outperformance of the benchmark – but less potential for beta – volatility in comparison to the benchmark – because “the rise of technology companies has been offset by declines in prior index heavyweights”.
Performance of BRIC countries vs MSCI Emerging Markets over 10yrs
Source: FE Analytics
Russia was further down the list at 19th place with an annualised performance of 7.75 per cent.
This places it below the average annual return for the MSCI Emerging Markets index itself, which was 8.89 per cent and above nine of the countries that make up the index.
At the bottom of the list sits Greece, which shouldn’t come as a much of a surprise given the difficulties the country has faced in the past decade, namely the multi-billion euro bailout from the EU to prevent the country from going bust that ended this year.
The country’s average annual return in the past 10 years is a loss of 17.21 per cent, while cumulatively over the period it is down 94.68 per cent.
The only other country that, on average, made a loss was Czech Republic, which was down 0.26 per cent per year.