James Burns, co-manager of the Smith & Willamson MPS, is tipping emerging markets to reverse their long-run underperformance of US stocks and argues investors looking for growth should not shy away from the region.
According to Burns, emerging markets are suffering their worst performance relative to the US in two decades. Year-to-date (YTD) data from FE Analytics shows this, with the MSCI Emerging Markets up just 0.36% in sterling terms and the S&P 500 jumping 19.8%.
Over 10 years, the difference in performance is much starker, with the S&P up 340%, versus a 90% gain for emerging markets. However, this isn’t deterring Burns.
“We would expect to see emerging markets grow at a faster pace than some developed markets over the next few years,” he said.
“There’s no reason to assume that other regions in the world won’t grow, but we think emerging markets are looking more attractive than they have done for some time,” he added.
Active over passive
To take advantage of this opportunity, Burns is holding a number of actively managed emerging markets funds within Smith & Williamson’s managed portfolios.
“We feel that passives haven’t covered themselves in glory in the emerging markets regions, and many, with their substantial costs involved, have been unable to track the market with the same efficiency as they have with the US and European markets, he said.
Within its higher risk portfolios, the Smith & Willamson MPS holds the BlackRock Emerging Markets Equity Strategies Fund. Given its contrarian value, Burns said it should act as a diversifier over the long term. He added that despite a poor year in 2020, it has performed well YTD.
“We also like the Goldman Sachs India Equity Portfolio, which we again hold in our more growth-focused portfolios,” he added.
“Whilst we have trimmed the fund previously, we are positive on the long-term outlook for India, as despite not having the same global industry leading companies, is somewhat of a safer market than China given the latter’s government risk.”
But covid isn’t out of the picture yet
For John Plassard, deputy director at Mirabaud Group, emerging markets are currently facing several headwinds, mainly owing to the lack of vaccines. As noted by the IMF in its latest report, nearly 40% of the population of advanced countries is fully vaccinated, against 11% in emerging countries, and a very small percentage in low-income developing countries.
“While developed countries are gradually returning to the path of growth and normalisation thanks to an effective vaccination campaign, many emerging countries are suffering from the Delta variant, at times imposing drastic new restrictions,” he said.
As a result, in combination with inflation risks, reduced tourism income and the potential for monetary tightening in the US, Plassard said it is advisable to be cautious on the emerging global theme for the remainder of the year.
“This situation will push analysts to increasingly reduce their growth estimates on this theme,” he said.
“One must take care, however, to distinguish the good students from the bad analysing such factors as the direction of the local currency, the political situation, the degree of fiscal and monetary stimulus, dependence on raw materials, government interference in the private sector and the return of final demand.”
