After a rocky few years, the Global Emerging Markets sector has picked up in 2016, with the sector showing an increase of 31% over the year to date at the end August.
This makes it the second top performing AIC sector over the year to date, with companies such as Templeton Emerging Markets Investment Trust and JPMorgan Global Emerging Markets Income Trust amongst the top performing companies across the entire sector over the year to date (12th and 21st place respectively). Yet whilst the Global Emerging Markets sector has outperformed the wider industry average by 23 percentage points over 10 years, it has underperformed by 52 percentage points over 5 years, as the table illustrates. What a tumultuous ride emerging markets have been.
Share price total return (%) to 31 August 2016
|1 year||3 years||5 years||10 years||YTD|
|Overall Weighted Average ex VCTs||11.54||32.61||65.79||112.65||8.71|
|Global Emerging Markets sector weighted average||32.25||18.20||14.29||137.81||31.37|
As the value of sterling fell after the Brexit result back in June, those who were invested in emerging markets received a boost. But is investor interest in emerging markets sustainable and can the emerging markets rally take root?
Today, the Association of Investment Companies (AIC) hosted a media roundtable with Omar Negyal, manager of JPMorgan Global Emerging Markets Income Trust and Carlos Hardenberg, manager of Templeton Emerging Markets Investment Trust, on the outlook for the sector. Their views have been collated, along with those of Bernard Moody, senior investment manager of Aberdeen Emerging Markets Investment Company and Aberdeen Frontier Markets Investment Company.
Outlook for emerging markets
Carlos Hardenberg, manager of Templeton Emerging Markets Investment Trust said: “Over the past few months emerging markets have continued to outperform developed markets as investor confidence has improved. Fund flows have remained robust, leading year-to-date flows to turn positive. That said, investors generally have a much lower weighting to this asset class in their portfolios. We believe that investors’ underweight position, attractive valuations and the search for higher-yielding assets could continue to support long-term performance in emerging markets.”
Omar Negyal, manager of JPMorgan Global Emerging Markets Income Trust said: “There has been a material uptick in the outlook for emerging markets this year as we’ve seen currency stabilization and emerging market economic growth starting to feed through. This has resulted in early glimmers of evidence that emerging market earnings are on the verge of making a comeback.”
Bernard Moody, co-manager of Aberdeen Emerging Markets Investment Company and Aberdeen Frontier Markets Investment Company said: “With emerging markets equities having risen by almost 30% so far this year, albeit with sterling weakness flattering returns to some extent, the obvious question is whether or not the rally can continue.
“We believe there are reasons to remain optimistic. Firstly, broad economic performance is showing signs of improvement across the emerging world and appears to be contributing to the first positive earnings surprises we have seen in a number of our markets for several years. The case is supported by equity market valuations that remain quite reasonable, particularly so when compared with developed markets. The same is true of emerging market currencies, which proved to be a significant headwind for much of this decade but have stabilised and in many cases are slowly recovering from undervalued levels.
“These positives have led to a recovery in investor interest resulting in modest flows into emerging market equities for the year to date, coming after three years of significant outflows.”
Omar Negyal, manager of JPMorgan Global Emerging Markets Income Trust said: “We like a number of semi-conductor companies in Taiwan, for example, which offer high returns on capital. Taiwan has a robust dividend culture where companies often payout over half their earnings as dividends. Apart from adding into weakness, into positions in Brazil and South Africa late last year - to capitalize on attractive dividend yields and fundamentals - we have made no dramatic changes to the portfolio over the past year which is benefitting from improving sentiment towards emerging markets as well as improving fundamentals. We have increased our underweight to China, as in general we see better dividend opportunities elsewhere.
“It’s still too early to say whether or not we’re at an inflection point but earnings appear to be on the right trajectory with some signs of stability. For the next leg of the emerging markets rally to take root, companies need to deliver consistent growth to ensure the earnings recovery is sustainable.”
Carlos Hardenberg, manager of Templeton Emerging Markets Investment Trust said: “Currently we are finding a number of good companies in the technology sector which are very cheap as they have been punished for the wrong reasons. Companies in emerging markets are moving up the technology learning curve very fast, whether it is in Fintech and digital banking or more innovative manufacturing and many other areas. We are also interested in the frontier market space, which offers a strongly growing middle class and some very good companies at valuations we haven’t seen in a long time. Lastly, another area where we are also finding value is in the mid cap segment which currently offers some very good bargains.”
Risks to emerging markets
Bernard Moody, co-manager of Aberdeen Emerging Markets Investment Company and Aberdeen Frontier Markets Investment Company said: “While developments in China must continue to be monitored, the other significant risks to emerging markets appear to emanate from external events, with a US presidential election looming and the UK yet to trigger negotiations on its formal exit from the EU. Nonetheless, lower debt levels and higher real interest rates provide for greater policy flexibility in emerging markets than developed markets and we still believe that the prospects of anything other than moderate rate hikes from the US Federal Reserve remain low.”
Global Emerging Markets – individual company performance
Share price total return (%) to 31 August 2016
|Company||1 year||3 years||5 years||10 years||YTD|
|Templeton Emerging Markets||39.01||13.03||2.41||143.90||41.04|
|JPMorgan Global Emerging Markets Income||26.63||14.55||34.43||35.79|
|Genesis Emerging Markets||30.86||18.72||21.78||142.53||29.47|
|Utilico Emerging Markets||33.24||36.18||60.09||170.26||28.20|
|JPMorgan Emerging Markets||31.43||32.75||33.59||142.57||27.27|
|Aberdeen Frontier Markets||18.36||15.83||44.12||22.50|
|Aberdeen Emerging Markets||26.37||15.50||5.09||62.63||18.53|
|Fundsmith Emerging Equities||21.46||16.75|
|Ashmore Global Opportunities USD||9.19||-7.72||-43.64||4.51|
|Ashmore Global Opportunities||0.97||-24.10||-50.11||1.83|
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- Discrete annual performance – share price total return (%)
|Company||31/08/2011 - 31/08/2012||31/08/2012 - 31/08/2013||31/08/2013 - 31/08/2014||31/08/2014 - 31/08/2015||31/08/2015 - 31/08/2016|
|Overall Weighted Average ex VCTs||2.57||20.43||10.89||4.39||11.54|
|Global Emerging Markets sector weighted average||-5.34||2.29||12.85||-20.49||32.25|
|Templeton Emerging Markets||-8.2||-1.31||115.24||-29.44||39.01|
|JPMorgan Global Emerging Markets Income||10.50||6.21||13.36||20.20||26.63|
|Genesis Emerging Markets||2.57||0.00||13.06||-19.75||30.86|
|Utilico Emerging Markets||8.72||8.13||15.33||-11.38||33.24|
|JPMorgan Emerging Markets||-1.39||2.05||10.04||-5.21||31.43|
|Aberdeen Frontier Markets||-5.29||31.38||19.86||-18.35||18.36|
|Aberdeen Emerging Markets||-10.84||2.05||10.64||-17.39||26.37|
|Fundsmith Emerging Equities||-16.16||21.46|
|Ashmore Global Opportunities USD||-33.22||2.56||-14.52||-11.85||9.19|
|Ashmore Global Opportunities||-35.84||2.45||-10.05||-6.43||0.97|
- Performance data is share price total return to 31 August 2016 based on the last official close price at the month end, on a total return basis. No expenses taken into account. Source: AIC using Morningstar.
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 345 members and the industry has total assets of approximately £150.7 billion.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.