Issues surrounding trade wars and good opportunities in countries outside of Asia are two reasons why investors should consider an emerging market specialist rather than an Asia-focused fund.
Last month, Schroders’ Richard Sennitt and Jupiter’s Jason Pidcock argued that investors may be better off in a dedicated Asia fund.
Below, BlackRock’s Andrew Swan and RWC Partners’ John Malloy argue the opposite – that investors should look for a global emerging markets fund.
Swan, head of Asian and global emerging market equities at BlackRock, said the fundamentals for Asian equities remain solid.
Of particular note, the strong economic and corporate earnings growth have been prevalent in the region over the past few years, helping the MSCI Emerging Markets index return 31.59 per cent over the last two years – broadly in-line with developed markets.
Performance of indices over 2yrs
Source: FE Analytics
Despite this, however, he said there is an underlying concern that US protectionism will affect the economic outlook for the region.
Indeed, with an upcoming deadline for US tariffs to be implemented on Chinese imports, Barclays Smart Investor head of investment strategy Will Hobbs said: “The drumbeat of a full-blown trade war is certainly getting louder.”
Although he added that at this stage it is “more likely a negotiating strategy on the part of the US administration designed to prise open further a Chinese economy which remains amongst the most protectionist in the world”.
Away from trade wars, BlackRock’s Swan said that the US dollar remains an issue, with the greenback up 6.49 per cent against the pound over the last three months.
“The strengthening of the US dollar has also added to investor uncertainty as a strong dollar tightens financial conditions for local economies and makes it harder for debtor nations to service dollar-denominated debt,” the manager of the BlackRock Asia and BlackRock Emerging Markets funds, said.
“Asia, despite being relatively isolated as reliance on dollar financing is much lower than in other regions, tends to still get caught by that negative sentiment.”
As such, investors may wish to look towards an emerging market fund as they give access to not only Asia, but a range of other profitable markets.
“Our view is that as growth continues to pick up, companies will begin to use high cash balances to reinvest in their businesses. These positive fundamentals that are driving local corporate profit trends have yet to be echoed in the equity markets,” he said.
Malloy, manager of the RWC Global Emerging Markets fund, said it is undeniable that Asia presents some of the best investment opportunities within the emerging market universe, as the macroeconomic environment in north Asian markets and some Association of Southeast Asian Nations (ASEAN) markets is currently conducive for earnings growth.
“However, economies such as Russia, Brazil and Saudi Arabia present growth opportunities similar to Asian markets,” he said.
Indeed, all three markets (as represented by their MSCI benchmarks) have outperformed the wider MSCI Emerging Markets index over the past three years, as the below chart shows.
Performance of indices over 3yrs
Source: FE Analytics
“Russia continues to see an accommodative environment of low inflation and monetary easing. Private sector demand is picking up and growth and earnings momentum will likely continue to recover,” Malloy added.
In particular, he noted that financials and energy-related companies will benefit from an environment of low credit penetration and higher oil prices.
Meanwhile, Saudi Arabian companies will benefit from higher oil prices in addition to an expansionary fiscal budget, capital markets liberalisation and MSCI and FTSE re-classification.
Again, he said that financials and insurance companies will profit from increased loan growth and a higher number of policies as the level of integration improves within the economy.
Finally, turning to Brazil there is an “encouraging dynamic” of positive GDP growth, recoveries in consumption and capex and private bank lending.
“We are particularly excited about the industrial sector which will profit from the country’s increased infrastructure development,” Malloy said.
Both Swan’s BlackRock Emerging Markets and Malloy’s RWC Global Emerging Markets are top quartile performers over the last year in the IA Global Emerging Markets sector, returning 5.81 and 8.89 per cent respectively.
The BlackRock fund was launched in 1993 and is a second quartile performer over three, five and 10 years although Swan and co-manager Gordon Fraser only took over in 2017.
Currently, the portfolio is underweight China, Taiwan and Brazil while overweight Saudi Arabia, Korea, India, Russia, Thailand and Mexico.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
Malloy has run the RWC fund since its launch in 2015 and is most overweight Zambia, Ghana, Saudi Arabia, Russia and Greece while underweight the likes of India, China and Taiwan.
However, Ostrum Asset Management equity chief investment officer Jean Louis Scandella said that comparing the Asia and emerging market funds is like looking at apples and pears.
“Asking if an investor should invest in an Asia-ex fund or in a global emerging market fund is like asking if he should prefer pears to apples. First pears are sweeter,” he said.
“You’ll find more growth in Asia, more new economy businesses building the 21st century and more dominating world leaders than anywhere else in emerging markets.”
Conversely, he said that apples (the emerging markets) have a particular taste. By this he meant firstly that global emerging market funds are an exposure to truly emerging markets with potential convergence to developed economy.
Meanwhile Asia funds are “tech-oriented in semi developed countries threatened by the middle income trap syndrome”, he said.
Second is that global EM funds are truly diversified, while Asia funds are China plus funds with a Chinese risk impacting directly and indirectly 75 per cent of the portfolio.
Finally, global emerging market funds are indeed offering lower growth, but at a lower price with a better balance sheet.
Therefore it is less of an either or scenario and instead whichever investors believe is right for their risk-appetite and portfolio preference.