The National – Emerging markets race ahead after a decade in the doldrums

Research from Fidelity International has emerging markets as the best performing asset class of 2017

Emerging markets roared back to form in 2017 to reward investors who stuck by them through the last disappointing decade.

China and Asia-Pacific region led the charge, surprising those who had written off the region after years of erratic performance.

The question now is whether they can continue their run in 2018, and whether there is still time for investors to join in the fun. So far, the answer seems to both questions appears to be yes unless we get a major shock, such as intensified conflict with North Korea, or President Donald Trump launching a trade war with China.

Bumper year

EM have just posted their best year since 2009, growing a meaty 37.72 per cent in 2017, according to MSCI, well ahead of the rest of the world, which grew 14.4 per cent.

China had an astonishing year, its stock market growing 52.5 per cent, while India grew 30.49 per cent, South Africa 36.12 per cent and Brazil 24.11 per cent. Of the emerging giants only Russia disappointed, rising just 0.08 per cent.

Separate research from Fidelity International shows EM were last year’s best performing asset class, racing ahead of Europe, Japan, the UK and US in what was a strong all-round year for global stock markets.

The Asia-Pacific region, which includes emerging countries such as China, India, India, Taiwan, Thailand, Hong Kong, Philippines, Malaysia and Singapore, was the second-best performer.

Tom Stevenson, investment director for personal investing at Fidelity, says Asia and EM should continue to fly in 2018. “The long-term regional growth story remains intact and stock market valuations are still reasonable despite recent successes.”

Before tipping your money into emerging markets however, it is important to remember that past performance is never a reliable guide to future returns. Last year’s winner is often next year’s loser.

Also, check what exposure you already have to countries such as China and India; you may have more than you realise after the last rip-roaring year, Mr Stevenson says. “As we continue further down the uncertain final stretch of this nine-year bull market, it pays to have a balanced portfolio.”

However, emerging markets certainly look an appealing destination right now.

Remember the BRICS?

Jim O’Neill, then chairman at Goldman Sachs, coined the term BRICS back in 2001 to describe emerging giants Brazil, Russia, India and China. The original quartet has since been joined by South Africa.

These five countries cover a quarter of the world’s landmass, have a combined population of around 3.6 billion, produce half the world’s workforce and account for around a quarter of global GDP.

Their economies and stock markets flew in the run-up to the financial crisis, with China repeatedly posting double-digit annual economic growth to become the world’s second-biggest economy, but they could not escape fallout from the developed world’s meltdown.

The BRICS fell like a ton of bricks in 2008, losing a massive 49.74 per cent of their value, with further sharp falls both in 2011 and 2015. They sparked global panic in January 2016 amid fears over credit and property bubbles in China, but the only way has been up since then and investors are flooding back into the sector.

HSBC’s EM strategy team recently issued a 20-page report saying it expected the flood to continue in 2018, amid solid Chinese growth, greater stability in Brazil, and stronger commodity prices, still the chief export for many emerging economies. They should also benefit from the robust global economy, with Europe in particular growing strongly.

Resilience

Vijay Valecha, chief market analyst at Century Financial Brokers in Dubai, says the 2017 recovery was driven by greater confidence in the region’s resilience to economic shocks, with Hong Kong and India doing particularly well. “The Hong Kong 50 rose by 45.2 per cent in 2017, India’s Nifty 50 climbed 33.5 per cent,” says Mr Valecha.

Chinese stocks such as retail major Alibaba, internet enterprise Tencent, web services company Baidu and online retailer JD have strong growth fundamentals and support from analysts, he says, and are attracting foreign investors.

Mr Valecha retains a bullish outlook for 2018 as EM play catch-up with a slowing US. “Countries like Brazil and Russia have ample scope to cut interest rates, even as the US Federal Reserve continues to tighten. In India and East Asia, newly minted middle-class consumers are helping companies generate big gains, particularly the banking sector.”

Mr Valecha says the best way for ordinary investors to tap into these markets is through an exchange traded fund (ETF), a low-cost passive investment vehicle that tracks the performance of a range of global markets.

ETFs also spread your risk and offer diversification by investing in hundreds of different companies, he adds. “Investing in international stocks, especially emerging markets, requires deep understanding of that particular country’s economics. ETFs eliminate most of the hard work because each fund includes a wide variety of holdings that focus on a specific theme.”

Mr Valecha tips iShares MSCI Emerging Markets ETF as a good general emerging markets fund. The US$42 billion fund, listed in New York and like most ETFs available on global share dealing websites, grew 36.42 per cent last year. Roughly 30 per cent of the fund is invested in China, 15 per cent in South Korea, 11 per cent in Taiwan, with further exposure to India, Brazil, South Africa, Russia, Mexico, Thailand, Malaysia, Indonesia and Poland.

For more focused exposure to emerging markets Mr Valecha recommends either Vanguard FTSE Pacific ETF, Morgan Stanley India Investment Fund or PowerShares Golden Dragon China Portfolio.

Source: The National.