2019 was a mixed year for emerging market investors, with countries such as Brazil and Russia posting outsized returns while India and others underperformed. A strong US dollar and trade worries, and China’s sagging growth had a ripple effect across the developing world. And political and currency crises in Chile, Argentina and Turkey have damaged investor sentiment.
Where should EM investors expect the best returns in 2020? And will frontier markets make a comeback after a disappointing year?
Will it Be Korea’s Year?
South Korea has been buffeted by global events and growth has been affected by the trade dispute between its neighbour China and the US. The country's Kospi index had a choppy 2019, gaining just 7% overall, making it one of the emerging markets laggards of the year.
But some investors are spotting opportunities in the country; Morningstar Investment Management (MIM) has been upping its allocation to South Korea of late. Mike Coop, head of multi-asset portfolio at MIM says: “South Korea offers a better opportunity for long-term investors than most other developed and emerging markets. It is one of the few trading below fair value."
The country's dominant industry - semiconductor chips that are found in computers and smartphones the world over - went into a downturn in 2017 and is yet to recover. Coop thinks there are opportunities in the industry as well as the banking sector, where he thinks stocks are undervalued.
The managers of the Neutral-rated Templeton Emerging Markets Investment trust (TEMIT) have upped their exposure to South Korea this year too. South Korea’s Samsung is the trust’s largest holding, and the smartphone maker’s stock climbed more than 40% last while its second biggest holding, Taiwan Semiconductor, surged 50%.
Taiwan Semiconductor, a favourite of many emerging market managers, is also the biggest holding of Gold-rated Schroder Asian Total Return (ATF) with Samsung the second largest holding.
In the wider Asia region, BlackRock Frontiers trust (BRFI) co-manager Emily Fletcher prefers south-east Asian countries such as Indonesia, Thailand, Malaysia and Vietnam to those in North Asia. But these countries have been among the laggards, pushing the trust’s share price down 3% in 2019.
China’s Had a Tough Year, But Stocks Are Up 20%
China’s Shanghai Composite Index climbed 20% in 2019 despite trade war drama and a widely-documented slowdown in growth. This compares with 2018’s terrible year for Chinese equities, when indices were off 25%. With signs of progress in the trade dispute, active managers managed to produce strong returns – First State Greater China Growth Fund is the only emerging market fund rated Gold by Morningstar analysts and was up 27% in 2019.
Jeremy Podger, manager of the Silver-rated Fidelity Global Special Situations Fund, thinks the trade war – even if it’s resolved – is the precursor to structural changes in the Chinese economy, which doesn’t bode well for returns.
Templeton Emerging Markets Investment Trust manager Chetan Seghal remains cautious while the US and China are at loggerheads and expects more market volatility until a more comprehensive deal is finalised.
Brazil Shines in Latin America
Political and currency turbulence in Chile and Argentina made for a mixed picture in Latin America, but BlackRock's Flethcer is optimistic about Argentina for 2020, as well as the wider Latin American region. Argentina’s Banco Macro is the second-biggest holding in the BlackRock frontiers trust.
The Frontiers trust is co-managed by Sam Vecht, who also runs the three-star rated BlackRock Latin American trust (BRLA). The lion’s share of the Latam trust is dedicated to Brazil (around 70%), so it’s no surprise to see that reflected in the 20%-plus gain in the trust’s share price last year.
India Funds Underperform
The re-election of Narendra Modi’s re-election as Prime Minister in May should have been a catalyst for a sustained stock market boom. But the BSE Sensex index struggled in the immediate aftermath of the election, although it finished 2019 up 14%, it was behind other emerging markets.
Indian funds and trusts have been some of the worst-performing in 2019: JPMorgan India was down 1.84% (compared to a gain of 43% for the Biotech Growth Trust, the top-performing trust of the year), whereas Bronze-rated Jupiter India fell 2.4% lower. Morningstar analyst Jan Nel says investors in JP Morgan India need to be patient as the trust’s highly concentrated portfolio makes it more volatile than the index.
Emerging Europe a Surprise Hit
Russia was one of the best performing emerging markets in 2019, with the MOEX hitting a record high. MSCI Russia was up 30% in 2019 and JPMorgan Russia was one of the best-performing investment trusts of the year, with a gain of more than 40% - beating the most successful global markets such as the S&P 500 and Nasdaq. Income investors have played a part in this recovery. “Russia has evolved from a very out of favour extremely cheap market to one more fairly valued and popular,” says Morningstar Investment Management’s Mike Coop.
JPMorgan Russian manager Oleg Biryulyov says Russia remains unloved as a stock market but is attracting the interest of overseas income investors with its 7% yield.
Income Play
Global investors are increasingly looking to emerging markets for yield – Mexican bonds, for example, pay above-inflation coupons. Inflation, once a severe risk for emerging market investors, is now under control, says Ashmore’s head of research Jan Dehn, although Turkey and Argentina are the exceptions.
It’s been a very strong year for global equities generally and returns may be tougher to find in 2020. The difference between the worst and best performing countries backs the case for active management in picking the winners, but in some cases passive funds would have performed better – for example in India.
A number of index funds under our coverage are highly rated by analysts – Fidelity Index Emerging Markets has a Morningstar Analyst Rating of Bronze, has an ongoing charge of 0.20% and returned 14% in 2019. Similarly, L&G Global Emerging Markets Index also has a Bronze Rating and delivered 16% in the year.
This post by James Gard initially appeared on Monringstar.co.uk
