February 2015 - Emerging markets
It has been a relatively quiet time for Emerging Markets since prices started recovering from the financial crisis meltdown in 2009. The experience of the major indices, the BRICs, has been divergent to say the least. Russia rebounded strongly on the back of its resource-intensive economy and demand for oil and industrial metals notably from China. But in 2011 the picture changed as the Chinese economy started a slow and gradual decline and then Ukraine came into the picture and the oil price fall in 2014 was the final straw. So over six years the RTS has fallen by 17%.
A very different story in India where Narendra Modi became Prime Minister in May 2014. He led the Bharatiya Janata Party (BJP) to an outright majority in the Indian parliament, - the first time that this has been achieved since 1984. With this secure platform he hopes to emulate the success he had as Chief Minister of Gujarat state across the whole of India. It will not be easy overcoming the vested interests (bribery and corruption in a non pc world) but he has made a promising start and the Bombay Sensex is up 134% over six years only marginally behind the S&P 500 in sterling terms.
China is a mystery as ever. The management of the Middle Kingdom has played a pretty good hand at their version of capitalism and China is currently the main driver, in terms of GDP, of global growth. No one is quite sure what the number for that series really is but China is definitely growing and, with a burgeoning middle class, they will eventually succeed in reducing their reliance on exports. The Shanghai Composite has languished for most of the period since 2009 despite the strong growth numbers but now that the economy is slowing the market has got a move on and has risen nearly 50% over the period. A useful example of the tenuous link between stock markets and GDP.
Brazil was initially helped by the demand for commodities but, like Russia, it too has succumbed to falling oil and metal prices. The other factor that also has a bearing on emerging markets is the strength of the US dollar. A depreciating currency can be an advantage by making exports more competitive. But it also makes imports more expensive, driving up inflation, and increases the cost of their dollar-denominated debt; this latter point is likely to be a matter of some concern if dollar strength continues. The correlation between a rising US dollar and falling emerging equity markets, and vice versa, is clear although there is often a time lag. If the dollar has had its run then we expect emerging markets to have another significant period of outperformance, but volatility will also return and as ever it is all in the timing! Certainly the Chinese market looks to have bottomed and Invesco Perpetual Hong Kong and China is our preferred Elite Rated fund here.
Although the Emerging Markets sector has been viewed as unattractive over the past 12 months it is attracting attention on a relative valuation basis and some of the front runners have been attracting significant flows. These include Lazard Emerging Markets and M&G Global Emerging Markets, both of which are Elite Rated by FundCalibre. Two relative newcomers also gaining popularity are the PFS Somerset Emerging Markets Dividend Growth fund and the Charlemagne Magna Emerging Markets Dividend fund. The Charlemagne fund is Elite Rated and led by Mark Bickford-Smith a very experienced manager with a background of very thorough analysis and understanding of the stocks researched, developed during his time at T. Rowe Price, so highly rated in terms of the qualitative nature of the portfolio plus a high AlphaQuest quantitative ranking.
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Clive Hale, Director – April 2015
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