AJ Bell, Architas and Investment Quorum reveal their emerging markets strategies

Three experts share their tips on how to play the emerging market rally

Russ Mould, investment director, AJ Bell

Emerging markets were in the doldrums for most of this decade but started to recover in 2016 and had a terrific 2017, with Asia Pacific leading the way.

The combination of valuations far from stretched by historic standards, falling inflation and interest rates in key markets like Brazil and Russia, and improving governance should be helpful again this year, although greater care is needed after the gains we have seen.

North Korea is one potentially volatile element, while corporate governance in South Korea still needs work, and it is unsure whether the military will let planned elections go ahead in Thailand.

Any stumbles in the technology sector could also make the going tougher for Asia, as the Chinese social media and Korean and Taiwanese semiconductor and components suppliers were strong drivers of 2017 performance.

Indian tech valuations now look pretty full, too.

But there is still plenty of value to be had and yield to be harvested. Actively managed funds to consider include Fidelity Emerging Markets and JP Morgan Emerging Markets Income. Those who would prefer less exposure to Latin America or Eastern Europe can focus on Asia via Fidelity Asia, Jupiter Asian Income and Invesco Perpetual Asian.

On the passive side, the iShares Core MSCI Emerging Markets EM IMI ETF provides cost-effective, broad-brush exposure to just under 2,000 stocks, although those of a more nervous disposition will note many of the biggest holdings here include some of 2017’s strongest performers, notably China’s Tencent and Alibaba, Korea’s Samsung Electronics, and Taiwan Semiconductor Manufacturing.

Peter Lowman, chief investment officer, Investment Quorum

Emerging market returns for 2017 were excellent, with the MSCI Emerging Market index rising 34 per cent. Although sentiment towards the sector had suffered in recent years, the turnaround in the global economy has acted as a tailwind.

With earnings projected to increase by 13 per cent in 2018, and fundamentals looking at their best for over a decade, it is likely that further returns will be seen throughout the year.

Obviously, there are risks, such as US protectionism, currency volatility or a geopolitical event that could derail the current positive momentum. However, it is likely that emerging markets will now benefit from a sustained bull market rally given the positive global economic backdrop.

With regard to investing, much would depend on a client’s appetite for risk. Specific countries such as China, India, Vietnam and even South Korea have already been benefiting from inflows and subsequent performance – and, of course, their potential for long-term growth and prosperity over the developed world does remain very attractive.

But most investors will tend to prefer access via a wider ranging emerging market fund. The Baillie Gifford Emerging Market Leaders or Hermes Global Emerging Markets funds have excellent track records and highly experienced fund managers, but there are many others to choose from, both from an active or passive perspective..

Adrian Lowcock, investment director, Architas

The outlook for emerging markets has changed dramatically over the past 18 months, although China remains the dominant force, and we expect growth there to continue strongly.

The country has shifted from a “Made in China” approach to a “Made for China”. It is a leader in technology, and is becoming increasingly influential through projects such as the “One Belt, One Road” initiative.

We have a bias towards countries close to China, which will benefit from a halo effect.

Looking more broadly, emerging market valuations look attractive compared with the rest of the world. The sector is seeing improved economic conditions and capital investment, and these cycles tend to last several years.

At the early phase of a recovery, as we are seeing in emerging markets, momentum is the main driver. This momentum is set to continue in 2018, with US dollar weakness supportive of the asset class.

Indeed, performance is not entirely down to the region’s own potential. The macro environment really does matter when deciding how to invest.

With this in mind, investors should look for fund managers that combine stock-picking skills with good macro knowledge.

It is also important to remember that, while the asset class offers growth potential not easily available in developed markets, many investors have been burnt chasing this and investing in companies not focused on their customers or shareholders.

Managers who have a philosophy of growth at a reasonable price are well placed to protect investors’ capital in the volatility synonymous with emerging markets.

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