With annualised returns of just 3.9% and -0.3% from the MSCI Emerging Markets Index over three and five years, investors’ faith in the long-term appeal of global emerging markets has been put to the test in recent years.
War in Ukraine and weakness in China has weighed heavy on investor sentiment, testing the long-held truism that when it comes to emerging markets, investors accept the prospect of greater growth versus developed markets comes with the additional risk of increased volatility.
However, despite a flat return from the index year to date, after net outflows at the start of the year recent data from the Investment Association (IA) shows tentative signs that investor appetite for the asset class may be returning.
See also: Emerging markets: Back in the game
In March and April, there were combined net inflows of more than £300m into the IA Global Emerging Markets sector – negating outflows at the start of the year and leaving the sector in the black year to date.
What do the fund buyers think?
Ryan Hughes, head of investment partnerships at AJ Bell, notes that given how much China dominates the emerging markets index, its weakness means it is little surprise the region has been out of favour with investors for some time.
“However, the long-run growth story for broad emerging markets remains strong, with structurally higher growth, lower debts and better demographics, all of which should help drive long-term growth,” he says.
As a result, Hughes says AJ Bell remains happy to be overweight in the region, particularly in its higher-risk strategies that are “looking long into the future”.
Read the full article in Portfolio Adviser’s July/August 2023 magazine
