Posted inEmerging Markets

Managers retain faith in EMs despite selector pessimism

Jakarta skyline, emerging market

Despite investor sentiment towards emerging market equity funds being at a three-year low, some fund managers believe there is a buying opportunity over the next 12 months.

Speaking to Expert Investor, NNIP senior emerging market strategist, Maarten-Jan Baakum said over the next 12-months selectors should look to increase their allocation of emerging markets equities and bonds.

“We have seen quite a big correction [in emerging markets] because of global factors such as the US dollar appreciating and oil prices rising. But I do not think those issues will hold for [the next] 12 months. The [emerging market] universe as a whole doesn’t look too bad to me,” he said.

However, not all European fund selectors share this view. Last Word Research found that over the 12 months to June 2019, only 26% of European fund selectors were looking to buy global emerging market equity funds, 52% to hold, 10% to decrease, and 10% did not use the asset class.

Patience needed

Baakum said he would not advocate increasing allocation over the next three months in the lead up to the US mid-term elections in November – citing the risks from US-China trade war and the Brazilian election in October –  but he said over the next 12 months side he expected to be more confident to buy.

But he said over the medium term the volatile economic situation in emerging markets such Turkey, Argentina and elsewhere could begin to stabilise.

“I would wait for a bit of stabilisation and after a few quiet weeks it will then be better to buy rather than try to time it too aggressively,” he said.

Political noise

Acadian Asset Management senior portfolio manager Brian Wolahan said the recent slump in emerging markets had created good buying opportunities in EM funds and said that much of the “political noise”was an overreaction.

Wolahan said risks related to the appreciation of the US dollar was limited to a handful of EM countries.

“The negative [from a stronger US dollar] is that if you have assets in the Brazilian real or the Chinese renminbi they are worth less. But over the longer term it means these [export-led] markets are in better competitive position,” Wolahan said.

“Exports are cheap for dollar-based buyers and most of the consumption of these goods would be from the US and so in the longer-term that is a positive.

“Investors often overreact to events,” he said, citing how the economic crisis in Turkey has encouraged a wider sell off in emerging markets despite limited correlation to other markets.

Low returns

Bakkum said that the main reason to invest in emerging markets over the longer term was because of their superior growth, adding that returns in some emerging markets over the last decade have been modest.

“Ten years of no returns is not necessarily a problem as long as you believe that over the long term emerging markets will outpace developed markets,” he said. “That’s why people in general should hold a sizable chunk [of their portfolio] in emerging markets.”

Looking at FE Analytics data, since start of the year to 31 August the best performing emerging market fund domiciled in either Luxembourg or Ireland only returned 4.1%.

The fund, HSBC Global Investment Funds Emerging Wealth AC was followed by BlackRock Emerging Markets Equity Strategies A2 at 3.4%, Uni-Global Equities Emerging Markets RA at 2.3%, BMO LGM Greater India E Accumulation at 1.8%, and Schroder International Selection Fund Emerging Asia Z Accumulation at 1.1%.

Top emerging market funds v sector year to 31 August 2018

Top 5 EM funds year v sector to 31 August 2018

Source: FE Analytics

On the other side of the spectrum, the worst performing fund, Hauck & Aufhauser Abaris Emerging Markets Equity A fund lost 21.6% since the start of the year.

This was followed by Comgest Growth Global Emerging Markets Promising Companies R with a loss of 18.7%, Neuberger Berman Emerging Markets Equity E with a loss of 16.9%, and Bank Invest New Emerging Markets Equities R and Jupiter Global Emerging Markets Equity Unconstrained L accumulation both at a loss of 16.4%.

Unsurprisingly, January’s huge emerging market fund inflows of €11bn has taken a hit with May, June, and July all experiencing outflows totalling €7.8bn. However, current total flows for the year so far is at €14.1bn.

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Source: Morningstar


Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

Part of the Mark Allen Group.