June 9, 2021

A Three-Year Round Trip Through the World’s Workshops

by Dewi John.

Using the Lipper Leaders scoring system to analyse the best-performing funds in the IA Global Emerging Markets sector.

 

It is a truism that emerging markets are the world’s workshop. Much of your wardrobe has likely made its way over from Bangladesh; what sits on your shoe rack from Ethiopia. China has been the world’s largest exporter for the past 12 years.

It’s not just low-value products where these countries make their mark. The iPhone on which you fixate is nominally the product of a US company, but actually made in China—which is the world’s largest buyer of industrial robotics—and is steadily moving up the value chain. This process betokens a more diversified palette of stocks and sectors from which emerging markets managers can choose.

There could be further wind in this sector’s sails. Emerging market funds also give exposure to commodity-producing countries, such as Russia and Brazil. Consensus is that these should benefit from the post-pandemic take-off in demand. There’s even talk of a revival of a commodities supercycle. Personally, I’m sceptical, as the big driver—China—took its feet off the last supercycle’s pedals as it shifted from heavy industry and infrastructure, and global growth ratcheted downwards following the financial crisis. Still, even a post-pandemic reversion to mean could benefit these sectors and regions well into 2022.

 

Weak Dollar Positive

Lastly, on the bull case for emerging markets, they tend to do well in a weak dollar environment. Massive money printing and a huge fiscal deficit in the US would suggest that’s the likely environment for the coming period.

That said, emerging market funds have underperformed so far this year (delivering an average 0.7% over the past three months) following a strong 2020. There’s also the slings and arrows of outrageous fortune to duck and dive: one-year returns for the sector are 37.6%. Not bad—but the three-year returns are 25%.

Three-year top-performer Carmignac Emergents has returned 62%…albeit the same as its one-year figure. The fund has China allocations at more than 37%, with South Korea at about 20%. India is the third largest country allocation, at less than 10%. Emerging markets are of course a diverse mix, not least when it comes to COVID-19’s impact, with East Asia having recovered first, but South Asia and Latin America still very much within its clutches. This will likely impact performance. For example, China and India make up more than 30% and 25%, respectively, of the portfolio of second-placed BNY Mellon Global Emerging Markets. A month ago, their rankings were reversed, which may be down to the negative effects of India exposure for the latter.

But what’s a negative today may be a positive tomorrow: the timings of the stop-go effects of COVID-19 on various countries are one of those great Rumsfeldian known-unknowns—the Indian economy will at some point rebound from its pandemic-induced woes, but when, and how, this effects its economy and equity market is no easy call.

Emerging markets have traditionally come with greater volatility and, for those prepared to ride this out over the long term, a higher return. What’s more, their increasing importance in the world economy and the greater choice on offer should bode well.

 

Table 1: Top-Performing Global Emerging Markets Funds Over Three Years (with a minimum five-year history)

All data as of April 30, 2021; Calculations in GBP. Source: Refinitiv Lipper

 

This article first appeared in the June edition of Moneyfacts, page 26.

 

Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.

 

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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