The stock market sell-off that began in October 2018 could be the trigger that prompted UK fund selectors to favour the “relative protection” of global emerging markets in Q4 2018.
Last Word Research reveals the asset class was the most popular during the quarter, followed by Asia ex-Japan and UK equities.
Cyrique Bourbon, portfolio manager at Morningstar, says the emerging market sell-off earlier in 2018 could explain why such a volatile asset class was favoured as markets tumbled.
Bourbon says: “With this bad news mostly being priced in, it is in some ways no surprise GEM equities offered greater relative protection in the late-2018 equity sell-off.
“On most measures, GEM valuations have improved markedly overall, but we’d caveat this by saying there are great country differences as the EM block is very heterogenous.”
UK fund selectors net buyers in Q4
Source: Last Word Research
AJ Bell head of active portfolios Ryan Hughes pointed to the fact the survey was focused on UK investors.
Hughes argues: “Brexit has certainly made investors think more about how much exposure to have overseas, with investors benefitting from weakness in sterling once their overseas holdings are translated back into our home currency.
“In addition, with fears that GDP growth will likely be curtailed in the UK in the forthcoming years, almost regardless of the Brexit outcome, investors have been looking further afield to try and find more attractive long term growth opportunities and the emerging markets certainly fits this bill.”
He echoed the views of several fund selectors Portfolio Adviser spoke to that the EM sell-off went too far and then presented buying opportunities.
Country favourites
Despite slowing growth, the US trade war and concerning levels of debt, Willis Owen head of personal investing Adrian Lowcock sees appeal in China, the world’s second largest economy, due to headwinds being largely priced in and the fact it can help itself through stimulus programmes.
“Asian emerging markets are likely to continue to benefit from the halo effect of China’s growth,” he adds, while Brazil’s far-right leader is also considered supportive for markets, even though commodities could throw a spanner in the works for the Latin American economy.
Turkey, Argentina and South Africa are countries of concern due to their sensitivity to the US dollar, he says.
Chelsea Financial Services managing director Darius McDermott said they are overweight India due to its good demographics, reformist government and well-established stock market; however, it is historically expensive.
“Latin America is temperamental,” McDermott says.
Bourbon says while there is value in South Korea and Taiwan, there is also value in idiosyncratic markets like Russia and Turkey, although they are not without clear risks. “The most unattractive parts of EM in our view remain Latin American, ASEAN and Indian equities, largely on valuation grounds.”
Hughes argues large economies such as India and China should be tackled on a stock picking basis.
EM fund picks
AJ Bell has a 37% allocation to Asia and emerging markets in its highest risk portfolios. As economies shift from being export led to domestically focused, Hughes says he sees the long-term attraction of being more heavily exposed to the asset class. Core exposure comes from Fidelity Emerging Markets, managed by Nick Price. The fund underperformed in 2018 but he likes it for the depth of resources within the asset manager.
The JP Morgan Emerging Markets Income fund, run by Omar Negyal, is used in the income portfolio.
McDermott says Chelsea Financial Services is consistently overweight GEM and Asia throughout all portfolios.
His favourite funds include Fidelity Asia Pacific Opps, RWC Global Emerging Markets, Hermes Asia ex Japan, GS India and First State Greater China Growth.
Lowcock adds his allocation is around 10% but he has no intention to significantly make any changes at this stage. “For long term performance you need to take a ‘steady as she goes’ approach and back managers with sustainable and repeatable processes.”
Hughes adds that from a GEM perspective, AJ Bell’s He explains that although the fund underperformed last year due to a couple of stock specific reasons, it is a fan of the depth of resources within the Fidelity analyst base and believe that the pragmatic approach remains an appropriate way of accessing EM.
