Nine EM funds to consider for 2016
By International Adviser, 11 Dec 15
Investors in emerging markets are taking a view that the gap in GDP per capita can be closed by above-average growth in these economies and, consequently their equities markets, argues Caspar Rock, CIO at Architas.
The pioneering emerging markets funds launched in the late 1980s and early ’90s by investment houses such as Templeton and Fidelity have been joined over the years by other and increasingly more specialist funds, so that an investor can now narrow his choice down to style, sector or company size.
Architas would tend only to choose an emerging market fund for higher-risk profiled strategies and a potential investor should view them in a similar way.
The huge opportunities offered by these dynamic economies are evident but the risks are also considerable. Unlike their more developed counterparts, there is a heightened possibility of political upsets, such as the proposed impeachment of president Rousseff in Brazil, or geopolitical risk, such as Russia’s move into Ukraine in 2014.
Corruption is also a significant issue, whereby direct investment can be siphoned off into private hands. There can be an overdependence on the primary sector: witness the impact of the dramatic drop-off in the commodities supercycle on Russia, Brazil, Chile and South Africa. On the other hand, some emerging market economies can be direct beneficiaries of lower commodity prices: India, China and Taiwan would fall into this category.
The years since the global financial crisis have proved challenging for GEM equity markets, which have suffered a period of extended underperformance. Valuations now appear cheap on both an absolute and relative basis. Flows into the sector remain negative, although recently this effect has been less marked. The long-term drivers of the developing world lead us to conclude that these countries will selectively produce higher rates of growth than their developed world counterparts. Given that this should lead to improving levels of corporate profitability, we are hopeful of better performance from GEM equity markets in the future.
So where to look for investment opportunities? As more idiosyncratic developments materialise in emerging markets, we are in an environment in which it is increasingly difficult to make generalisations. Consequently, it is more important than ever to differentiate between countries and regions, and be selective in exposure as far as possible.
Within our GEM allocation, we currently have a preference for emerging Asia, a region that is benefiting from its status as an energy importer, and where the growth element is more visible. Conversely, we believe Latin America and eastern Europe stand to suffer in the foreseeable future, not least because of contagion from Brazil’s ongoing political scandals and inflation difficulties, and the Russian equity market’s vulnerability to the oil price.
With a discerning allocation, emerging markets could yet provide a lucrative addition to a multi-asset portfolio. We would, however, recommend patience and diversification.
Tags: Investment Strategy
