Why are investors turning their back on emerging markets?

Emerging-Market-India-Asia-700x450.jpg

Emerging markets have been out of favour for the past few years but the negative sentiment towards investing in the asset class is picking up, experts say.

Emerging market equity funds suffered their biggest weekly outflows since the 2008 financial crisis in the week to 12 June 2015, which saw investors pulling a net $9.27bn (£6bn) out of emerging market equity funds, according to data from funds tracker EPFR. Of this, $7.1bn came out of Chinese equity funds.

Worldwide, the industry has seen outflows from emerging market funds of more than $75bn (£48bn) since the start of 2013, according to Aberdeen Asset Management.

Aberdeen itself has seen £19.5bn in gross outflows in the second quarter of this year alone, as investors continue to shun emerging markets.

However, Aberdeen says the case for investing in emerging markets remains “unchanged”.

A company spokesperson says: “Economic growth – despite a slowing – remains superior to that in the developed world, the rise of the middle-class consumer and investment in infrastructure will be spurs to further expansion. Corporate profitability is improving, which gives us confidence given the tough environment, and valuations look attractive.”

However, Axa Wealth head of investing Adrian Lowcock says emerging markets are reeling from a slowdown in growth due to an over-reliance on exports and excessive borrowing.

Lowcock adds: “There is a general dislike for emerging markets at the moment. Also, it is a quite natural thing for emerging markets to go out of favour and be unloved for much longer than developed markets. It takes a while for sentiment to come back.”

Emerging markets have also recently become more exposed to swings in developed market economies and the effects of a stronger US dollar as companies have taken on trillions of dollar-based debt in recent years.

Henderson Global Investors co-head of multi asset Bill McQuaker says the outperformance of developed markets over emerging markets in recent years has been “immense”, and the growth gap between the two markets “continues to shrink”.

McQuaker remains cautious on emerging market equities, especially in the £236m Henderson Multi-Manager Active fund. Since April he has sold 5 per cent of its emerging market exposure and bought into UK equities and cash instead. Currently the emerging market equities exposure stands at 6 per cent.

Though it is “impossible” to say when investor sentiment will turn positive, says the Aberdeen spokesperson, some fund managers continue to invest in emerging markets with a long-term view.

Aberdeen Asset Management’s spokesperson says: “Our focus will continue to be on fundamentals and investing for the long-term on behalf of our clients.”

Square Mile senior investment research analyst Amaya Assan says many fund managers will maintain a long-term view on emerging markets.

“Some of the biggest fund managers still have a big exposure in markets like India or Latin America as they are willing to be more patient. Volatility is allowing them to get into companies they like,” she says.

In recent months, however, the large outflows from the region have sparked some fund manager moves in the emerging market sector.

Earlier in July, Franklin Templeton’s Mark Mobius stepped back from the day-to-day management of the Templeton Emerging Markets IT after 26 years at its helm. Carlos Hardenberg, senior vice president and managing director of the Templeton Emerging Markets Group, will take up Mobius’ role in October.

In May, Jason Pidcock left the £4.4bn Newton Asian Income to run a new Asian Income strategy at Jupiter.

Meanwhile, in November last year Jupiter saw the departure of two veteran fund managers – Jupiter JGF China fund’s Philip Ehrmann and Kathryn Langridge, manager of the Jupiter JGF New Europe fund and two UK-domiciled emerging Europe funds.

Prior to Mobius’ move, Tilney Bestinvest downgraded the Templeton Emerging Market Trust from three to two stars and removed it from its top-rated funds.

Tilney Bestinvest research director Victoria Chernykh says the team downgraded the fund as it felt Mobius’ management “could not function efficiently”.

She says: “Mobius was trying to do too many things at once, overseeing the global team of more than 50 investment professionals as well as managing funds.

“This lead manager change could potentially be positive for this close-ended fund, as arguably Hardenberg will have more time to devote to the fund than Mobius did.”