After a disappointing 2015 in both relative and absolute terms, investors in global emerging markets have had a more positive start to 2016 with a significant turnaround in the fortunes of the asset class, and in terms of the drivers of performance.
Last year, the MSCI EM NR USD Index produced a negative return of just under 15%, compared with -2.4% for the MSCI ACWI NR USD Index.
Investors were hit by weakness within the Latin America region and within that by weakness in Brazil, where the MSCI Brazil 10-40 Index fell by just over 40% in US dollar terms.
The market fretted over corruption scandals at national champion Petrobras, weak commodity prices, growth in freefall, high inflation and political uncertainty.
In addition, there was also significant weakness in South Africa, where the market and currency fell significantly amid weakness in commodity prices, lacklustre growth, a lowering of the country’s debt rating and political issues.
Eastern Europe suffered the least, with Russia producing a positive return over the full calendar year.
In terms of style in 2015, growth outperformed on a relative basis, while smaller-cap stocks also stood up better than their larger counterparts, something that often occurs during weak markets as foreign investors allocate away from the region and move out of the liquid benchmark names.
At the sector level, basic materials, communication services and financial services were the main detractors.
Performance to the end of April 2016, however, reflects a turnaround driven by a general increase in global risk appetite, with a positive return of 6.3% for the MSCI EM NR USD Index compared with 1.7% for the MSCI ACWI NR USD Index.
The swing from negative to positive in some emerging markets has been driven by a dramatic increase in commodity prices, themselves driven by the historically low prices and a slight easing of concerns surrounding China and the extent of economic slowdown and currency devaluation.
There has also been some respite in terms of currency movements, with the US dollar weakening following signals from the Federal Reserve that US interest rates are likely to rise at a slow pace.
Continued on the next page