For emerging markets, events of the past three months have confirmed the trend of the past five years.
Chinese equity woes pushed the MSCI Emerging Markets Index to a four-year low this week, erasing an early 2015 recovery driven by those same Chinese stocks.
Concerns over China’s economy and the knock-on impact on commodity prices are not new. The slide in EM indices seen since early 2011 meant few UK-based investors took part in the mini-rally seen at the start of this year. Recent moves appear to have borne out this caution.
The typical fund in the Investment Association’s Global Emerging Markets sector has now lost 11.3 per cent in the year to August 17, according to FE Analytics, dragging down average five-year returns to -2.7 per cent.
By contrast, the typical North American, UK and European fund has soared by 97 per cent, 67 per cent and 57 per cent respectively.
The losses, coupled with concerns over China’s slowing economy, a strengthening US dollar, and the prospect of rising US interest rates, have prompted investors to pull money from emerging market assets. Aberdeen Asset Management, for example, revealed last month that clients withdrew a net £9.9bn in the previous quarter alone amid turbulent conditions.
Is the bearishness now overdone? The latest Bank of America Merrill Lynch Fund Manager Survey showed global managers are now running the most significant underweight to emerging market assets on record – greater even than that seen at the height of the financial crisis.
Commentators claim those willing to accept higher risks in pursuit of higher returns could do well to pursue these out-of-fashion funds.
Patrick Connolly, from independent financial adviser Chase de Vere, said: “The long-term growth story remains largely intact. Growth in the emerging markets continues to beat that in the western world, and economic prospects should benefit from greater domestic consumption over time as emerging market populations have increasing levels of wealth and disposable income.”
Laith Khalaf, from Hargreaves Lansdown, agreed. He said: “On the whole, emerging market governments tend to have relatively robust finances and lower debt levels than most of the Western world. Furthermore, the long-term prospects for the developing world are supported by increased urbanisation, favourable demographics and an expanding middle class, which could help stimulate a consumption boom.”
There is little doubt that investing in these markets is considered risky – with Russia, for example, having a reputation for political instability – even if enthusiasts argue that fortune will eventually favour the brave.
It could take some time for markets to rebound. Darius McDermott, managing director of ratings agency FundCalibre, said investors should hold fire on returning to China funds for now, given “there are still many speculators nursing losses who will want to get out when they can”.
Further headwinds to growth remain. This year will mark the slowest pace of emerging market growth and the first contraction in exports since the 2009 crisis, according to HSBC economists’ forecasts.
