Global emerging market investors have been rewarded of late, with the MSCI emerging market index outperforming the global MSCI all country world index in both 2016 and 2017 to the end of April.
Last year, the market was led by value-orientated companies, which was clearly reflected in the relative performance of indices and investment funds both globally and in emerging markets.
To date, there has been a reversal of this trend, as the growth style has outperformed.
This about-turn in market leadership has produced rather testing conditions for investment managers in terms of producing consistent outperformance.
Reversal of fortunes
Generally, funds that have a growth style, such as Comgest Growth Emerging Markets, Hermes Global Emerging Markets and Fidelity Emerging Markets, have outperformed year to date, after underperforming in 2016.
The opposite can be said of some managers with a value bias.
There have, however, been individuals that have performed well in both environments through a combination of stock selection and asset allocation.
Funds in this group include TT Emerging Markets Unconstrained, T Rowe Price Emerging Markets Value, Equity Goldman Sachs Emerging Markets Core Equity, UBS Global Emerging Markets Opportunity and JPM Emerging Markets Equity.
Weakened argument
Looking ahead, it is clear that performance has weakened the valuation argument in favour of emerging markets, with valuation levels now close to average, both in absolute terms and relative to global equities.
That said, within the diverse markets in the emerging space there will always be areas of value for active managers to exploit, be they short-term traditional value opportunities or longer-term underappreciated growth situations.
Earnings estimates for emerging markets are suggesting a return to healthy growth in 2017, following years of flat or negative numbers, driven by the technology, financials and energy sectors.
The return to growth has made emerging markets equities relatively more attractive but it will not be plain sailing, as both global and country-specific macro risks remain.
This indicates not only the potential for continued good returns from the asset class but also plenty of scope for talented active managers to outperform.
Emerging markets – evolution of index weighting
Cyrique Bourbon, portfolio manager, Morningstar Investment Management:
“While emerging markets can look attractive, exposure carries unique risk as 70% of the index is represented by Asia. Therefore, it is important to either pick a high-conviction fund that is benchmark agnostic, or to think of emerging markets as three regional blocs – Latin America, Europe and Asia.
“The key is not to be afraid to allocate a dedicated position to a regional fund, especially when disparity on the risk and return is apparent.
“Emerging Europe currently trades at a discount to its intrinsic value, making it the most attractive of the three regions.”
