IN FOCUS
/ SECTOR PROFILE /
ONE DIRECTION
Despite the threat of US interest-rate hikes, Adam Lewis says all the
indicators for emerging markets appear to be pointing in the same way: up
A
FTER SEVERAL
DIFFICULT YEARS,
EMERGING
MARKET
INVESTORS have
recently had reason to be more
optimistic, with the sector
outperforming developed markets
for two years in a row. Continuing
the recovery that began in 2016
and propelled by an earnings
rebound, the MSCI Emerging
Markets index returned 25.4 per
cent in 2017, compared with 13.24
per cent from the MSCI World.
As a result, IA Global Emerging
Markets was the fifth best-
performing sector last year, while
the top spot went to a more
focused play on this theme – IA
China/Greater China, with a gain
of 36.51 per cent.
RETURN OF VOLATILITY
These returns carried on
into January, with IA Global
Emerging Markets climbing to
third spot with gains of 2.43
per cent. However, the return of
volatility in February took its
toll and at the time of writing
the sector is in negative territory
for the year.
Such events serve as a reminder
that investing in emerging markets,
or any type of risk asset for that
matter, is not a one-way bet. The
big question for investors, of course,
is whether the sector’s long-term
prospects still match up?
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RIGHT TO BE WARY
Ryan Hughes, head of active
portfolios at AJ Bell Investments,
says that it is right to be wary
of the impact that faster-than-
expected interest rate rises in
the US could have on emerging
markets. However, he adds that the
fundamental reasons for investing
in the sector continue to look
compelling.
“The emerging markets were
strong performers last year and
with global growth continuing to
progress and the all-important US
economy doing well, the backdrop
looks attractive,” he says.
“While higher rates could
cause a slowing of capital flows
towards these countries, the
direction of travel is now clearly
established and investors are
now looking beyond the simple
US relationship. Indeed, given
the pace of development in
many domestic economies in
this sector, the simple direct
correlation between emerging
markets and the US is not as
strong as it once was.”
Hughes adds that emerging
market equities continue to sit at
a signi ficant discount to global
equities on a price/earnings basis,
despite their strong performance
in 2017. Ownership of emerging
markets remains relatively
limited, but global flows turned
positive during 2017 and Hughes
says that should sentiment
remain in place, it is possible
that a large pick-up in emerging
market allocations could create
an attractive tailwind.
RISE OF THE CONSUMER
“Over the longer term, an
allocation to emerging markets
is clearly attractive as these
economies develop,” he adds.
“The rise of the consumer in
these markets is a long-term
trend and it will very likely be
domestic companies that forge
dominant positions rather than
traditional western businesses.
“This makes ownership of the
region highly attractive over
the very long term and while as
always there will be bumps along
the way, having material exposure
to markets such as China, India
and Vietnam to name just a few
will in all likelihood prove to be a
good move, particularly with the
demographic advantage that is
providing such a young, mobile
and motivated work force.”
UNDERESTIMATED
Another multi-manager with an
overweight position in emerging
markets and Asia is IBOSS. Chris
Rush, senior investment analyst,
says that while the favourable
demographics and valuations
relative to the West remain well
publicised tailwinds, the narrowing
of political disruption is perhaps
underestimated.
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