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.
NNIP senior emerging market strategist, Maarten-Jan Baakum, speaking to our sister publication Expert Investor, 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 said over the next 12 months he expects to be more confident to buy.
Over the medium term he thinks 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 that much of the “political noise” was an overreaction, including the contagion from the economic crisis in Turkey.
Wolahan said risks related to the appreciation of the US dollar were 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 a 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.”
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 sizeable chunk [of their portfolio] in emerging markets.”
Looking at FE Analytics data, since the 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
Source: FE Analytics
On the other side of the spectrum, the worst performing fund, Hauck & Aufhauser Abaris Emerging Markets Equity A fund has lost 21.6% year-to-date.
This was followed by Comgest Growth Global Emerging Markets Promising Companies R with a loss of 18.7%, Neuberger Berman Emerging Markets Equity E down 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.
Source: Morningstar
