31 May 2024
Emerging markets have fallen far out of favour in recent years, but we may be approaching the point in the economic cycle where they come in from the cold, according to RBC Brewin Dolphin.
Over the past five years, the MSCI Emerging Markets index has delivered a total return – capital growth and dividends – in sterling terms, before charges, of 18.46%, compared to 82.19% for the MSCI World index1. Funds focused on these emerging markets have been affected by a strong US dollar, geopolitical instability, slowing growth, a property crisis in China, and several other challenges in recent years.
However, with interest rates appearing to have peaked and the dollar beginning to weaken, the macro-environment is improving for emerging markets. In addition, country-specific risks have begun to dissipate, such as corporate change among South Korea’s family-owned ‘chaebol’ conglomerates, a turnaround in Argentina’s economy, and governance improvements in Brazil.
An emerging market is generally defined as a nation that is in the process of becoming a developed economy. The countries included on the list differ between investment houses, but generally they tend to include China, Brazil, India, Mexico, South Korea, and Argentina along with several others.
Rob Burgeman, senior investment manager at RBC Brewin Dolphin, said: “Many developed markets are trading at record highs – the USA, in particular, has had a great run, while the UK and Europe are faring relatively well despite some of the well-publicised challenges their economies face. It’s getting to the point in the cycle where, typically, areas that have underperformed start to turn and become an attractive option again.
“Emerging markets do have some attractive qualities. With the exception perhaps of China, broadly speaking they aren’t facing the demographic challenges that are going to be a big problem for the more developed world in the coming years. And, although there is a bit of a reverse in the trend of outsourcing to China, in all likelihood this will end up being moved to other emerging markets, such as Mexico.
“Not all emerging markets are equally attractive, however. In China, Yum Brands – the company behind the nation’s Pizza Hut and KFC franchises – trades on a price-to-earnings (P/E) ratio of around 16, while the equivalent business in India trades at a P/E of 1102. India is the most expensive market on the planet by some measures, which means it is probably not the right time to be filling up on Indian stocks. The best emerging markets managers also tend to cycle between different countries, helping to mitigate against big changes in their ratings.
“The challenges, along with the opportunities, emerging markets present to investors are a good example of why we recommend taking professional advice before making any significant investment decisions. A financial adviser will be able to guide you through how they fit into an investment portfolio and your wider financial objectives.”
Rob’s top five tips for investing in emerging markets:
- Opt for active, rather than passive, funds: they will help you sift out some of the more problematic areas and rotate between different markets, as performance changes.
- Go regional instead of country specific: funds that focus on individual nations are generally riskier and are more prone to political intervention and currency fluctuations.
- Look at the dispersion of returns: you may see some funds have delivered 40% gains at the top end but check the worst performers too – there will invariably be some very poor performers too.
- Be prepared for volatility: emerging markets are riskier propositions than more developed regions of the world, so they will inevitably have ebbs and flows – be prepared to stick with them for the long haul.
- Don’t assume the same approaches used elsewhere will work: while it may seem like focussing on expensive, quality-growth companies would work in emerging markets the way it does elsewhere, that’s proven not to be the case. Pick funds that are run by managers who know emerging markets well and have a good track record.
Emerging markets funds:
M&G Emerging Market Bond Fund – Rob said: “In simple terms, this fund allocates about one-third of its exposure to emerging market government bonds in local currencies, which comes with a higher degree of risk; one-third in US dollar-denominated government debt; and one-third in US dollar-denominated company debt. It is a decent yielder at around 6%3, investing in high-yielding bonds from the likes of Mexico, Singapore, and South Africa. It’s not one for the risk averse, but given where we are in the credit cycle this could be an interesting way to play emerging markets without the volatility that comes with equities.”
JP Morgan Global Emerging Markets Income Trust – Rob said: “The JP Morgan Global Emerging Markets Income Trust is a well spread fund. You often find emerging markets funds are either heavily skewed towards China or India, but in this instance the two only make up a combined 37% of its exposure4. The big names like Taiwan Semiconductor Manufacturing Company and Samsung are in there alongside Mongolian industrial groups and Indonesian banks, providing a mix of large and small cap holdings. With a yield of around 4% it offers a reasonable level of income, but it also has an ongoing charge of 1.4% meaning it is not particularly cheap5.”
Templeton Emerging Markets Investment Trust – Rob said: “Templeton’s emerging markets trust is the grandfather of the sector – it dates back to 1989 and has been a survivor in an area where plenty of others have failed. The trust also has a relatively strong, long-term track record in a highly volatile and sentiment-driven sector. South Korea is its largest geographical exposure, representing just over 20% of the fund, a reasonable proportion of which is made up by different arms of Samsung6. It currently trades at a wider than average discount of more than -15%, offering a dividend yield of around 3.2%7. Its ongoing charge of 1.09% is fairly typical for emerging markets funds8.”
iShares Emerging Markets Index Fund – Rob said: “For the more cost-minded, there is the iShares Emerging Markets Index Fund. For the reasons I have already outlined, we don’t think emerging markets lends itself well to passive funds or even some of the tried-and-tested approaches taken in other parts of the world – the Fundsmith Emerging Equities Trust is evidence enough of that. But, the iShares fund costs just 0.2% and provides exposure to many of the same names you’ll find in other funds dedicated to these markets, with the benefit of a historic yield of around 5.5% to provide a level of protection9.”
Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: 365345640.
1 Source: Bloomberg, actual returns may have been different
2 Source: Bloomberg
3 Source: Hargreaves Lansdown
4 Source: Hargreaves Lansdown
5 Source: Hargreaves Lansdown
6 Source: Hargreaves Lansdown
7 Source: Hargreaves Lansdown
8 Source: Hargreaves Lansdown
9 Source: Hargreaves Lansdown
– ENDS –
Rob Burgeman and his fellow investment managers at RBC Brewin Dolphin put together bespoke investment portfolios for clients based on their long-term objectives and their attitude to risk. The portfolios will have a mixture of hand-picked holdings in them including third party funds and individual stocks that are researched and recommended by RBC Brewin Dolphin’s in-house research team.
Five-year discrete performance (sterling terms):
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| MSCI Emerging Markets | 14.29% | 15.02% | -1.32% | -9.62% | 4.05% |
| MSCI World | 23.44% | 12.90% | 23.48% | -7.37% | 17.40% |
PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / 07412 739 093
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: +44 (0) 20 3201 3026
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £57.1* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 30th April 2024.
The value of investments, and any income from them, can fall and you may get back less than you invested.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: 365345640.
About RBC
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