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Asia & Emerging Markets

Asia & Emerging Markets sector

The Asian and emerging markets cover a broad range of countries at varying stages of economic development.

Kate Marshall - Investment Analyst
01 January 2017

The Asian and emerging markets cover a broad range of countries at varying stages of economic development. As young, emerging economies, the developing world tends to offer greater growth opportunities than the West, although this means they are a high risk and more volatile investment proposition.

Asian and emerging markets have undergone rapid economic growth and industrialisation in recent decades. Long-term growth should remain underpinned by a youthful and increasingly well-educated population, while a rising middle class is expected to boost consumption-led growth across the region.

This part of the world contains a diverse range of economies, stretching from Asia and Eastern Europe to South Africa and Latin America. Each country is at a different stage of economic development. Some are rich in commodities and natural resources; some are more reliant on exporting goods to Western economies; and others have a vibrant consumer-driven society.

Funds investing in the region have different areas of focus:

  • Emerging markets funds – offer broad exposure to global emerging economies, from Brazil to Malaysia and India to Turkey
  • Asia ex Japan funds – invest exclusively in Asian markets, such as China and the Philippines. Some will place greater focus on more mature and well-established economies, including Hong Kong, Singapore and Australia
  • Regional funds – others focus on a specific region or country such as Latin America, including Brazil and Chile, or Eastern Europe, which includes Russia

The region continues to face a number of challenges, including slowing growth in China and political turmoil in some countries. However, we believe the long-term growth potential remains intact. Like the rest of the world however, Asian and emerging economies will face challenges in the short term.

Our view on the Asia & Emerging Markets sector

Together, Asian and higher-risk emerging markets form a true economic powerhouse. In our view the long-term outlook for the region is underpinned by youthful and increasingly well-educated populations, rising domestic consumption and an increasingly wealthy middle class.

After a period in the doldrums, emerging markets started to look attractively valued at the end of 2015, according to our analysis. History has shown that investing when valuations are low can lead to excellent long-term returns. Stock markets have bounced strongly since, but these markets still look good value and we still see an excellent opportunity for patient investors. There are no guarantees, however; a market can stay cheap for some time and even get cheaper still, so a long-term view should be taken.

When investing in the emerging and Asia Pacific nations, we believe a diversified approach is sensible. The disparity between countries means this part of the world can be home to both the best and worst-performing global stock markets at any one time.

For investors seeking exposure to emerging markets for the first time we believe a broad global emerging markets or Asian fund is likely to be a good starting point. Other funds could then be added to provide additional exposure to a particular theme, area or country.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our favourite funds in this sector

First-class performance potential and low management charges

View the Wealth 150

Following a difficult 2015, Asian and emerging stock markets staged a recovery last year. A number of positive factors contributed to this, including fears over an economic slowdown in China easing; a rebound in commodity prices aiding resource-rich economies such as Australia; and the prospect of political or economic reform, which improved investor sentiment towards countries such as Brazil and India. UK-based investors benefited further from the strength of Asian and emerging markets currencies against sterling.

It hasn’t all been plain sailing, however. Emerging markets are more volatile than developed-world counterparts. For example, they experienced a short-term setback following November’s US election, as investors feared protectionist policies would harm exports. However, the constraints of office are likely to limit Donald Trump’s ability to carry out some of his more controversial ideas and the longer-term investment case for emerging markets remains intact, in our view.

Asia and emerging markets - one year performance

Source: Lipper IM to 31/12/2016. Past performance is not a guide to future returns.

Asian and emerging markets have delivered phenomenal levels of growth over the long term, although this is no guarantee of future performance. As emerging economies mature, they are building some of the world’s most successful companies and are overtaking some of their Western neighbours. While this could support growth over the long term, it will not be a smooth ride.

Annual percentage growth
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
FTSE AW Asia Pacific ex Japan 17.5% 1.3% 10% -3.5% 28.7%
FTSE Emerging 12.8% -5.3% 7.9% -10.3% 35.4%

Source: Lipper IM to 31/12/2016. Past performance is not a guide to future returns.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Five year performance

  • FTSE AW Asia Pacific ex Japan

    +62.7%

  • FTSE Emerging

    +39.9%

Data correct as at 31/12/16. Please remember past performance is not a guide to future returns.

Our favourite funds in the sector

We undertake a comprehensive review of every sector. Here we provide comments on a selection of funds of interest following our most recent Asia & Emerging Markets sector review. They are provided for your interest but are not a guide to how you should invest. If you are unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at January 2017. These funds invest in emerging markets, which are higher risk than developed markets. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

To view a full list of our favourite funds within the sector, visit the Wealth 150. There is a tiered charge to hold funds in the Vantage Service with a maximum of 0.45% p.a. - view our charges.

Other funds in this sector

Here we look at some other funds of interest following our most recent sector review. Please note the review period may be over a short time period and past performance is not a guide to future returns.

To view a full list of our favourite funds within the sector, visit the Wealth 150.

Source for performance figures: Financial Express

This fund aims to combine Asia's exciting growth potential with its burgeoning dividend culture in a single portfolio. It is biased towards developed Asian markets such as Australia.

While the fund delivered an attractive return in 2016, it lagged the return of the broader Asian stock market. The fund’s focus on higher-quality companies with good yields and sustainable cash flows fell out of investors’ favour in the latter half of the year, while some of the more economically-sensitive areas of the market, which the manager has avoided, outperformed. We maintain our conviction in Jason Pidcock and the long-term prospects for the fund. We feel a focus on dividend-paying companies located in developed Asian economies also differentiates the fund from many of its peers that focus on capital growth and emerging Asian markets. The fund is a concentrated portfolio of 39 stocks, which means each investment can have a significant impact on performance but this is a higher-risk approach.

The experienced Asian equities team at Stewart Investors focus on high-quality companies with strong balance sheets and robust cash flows, run by trustworthy management teams.

David Gait and the team at Stewart Investors seek quality companies with more defensive characteristics, which they believe will prove resilient throughout a variety of market conditions. This tends to lead them away from some of the more economically-sensitive companies that performed strongly in 2016. As such, while the fund delivered an attractive return last year, it underperformed the wider Asian stock market. The team’s cautious approach means we anticipate the fund to underperform a rapidly rising market, but hold up better during times of market weakness. With one of the longest and most-successful track records investing in Asian equities, we continue to view the team as a superior choice for exposure to the region.

This fund invests in higher-risk smaller companies exposed to higher-growth regions of the world. It offers something different to the majority of funds in the sector which have a greater focus on larger companies.

The fund performed similarly to its specialist smaller companies benchmark in 2016 and delivered a strong positive return. Matthew Dobbs, the fund’s manager, continues to focus on domestically-oriented consumer companies that he feels will benefit from the ongoing transition in Asian and emerging markets from export and investment-led growth towards domestic consumption. We are encouraged this fund is run by a highly-experienced investor in Asian equities and believe it could offer diversification to a portfolio biased towards larger companies.

This fund invests in Latin American stock markets, including Brazil and Mexico. We favour the team at Aberdeen for their long-term, disciplined investment approach for investing in this higher-risk region.

Latin America was home to some of the world’s strongest-performing stock markets in 2016. A rebound in commodity prices was viewed positively for resource-rich countries, while investor sentiment towards Brazil, the region’s largest economy, improved further following the impeachment of former President Dilma Rouseff and the subsequent appointment of a more business-friendly leader in Michel Temer. The fund’s performance benefited and received a boost from good stock selection, according to our analysis. We hold the team at Aberdeen in high regard for their emerging markets expertise.

This fund aims to track the performance of the FTSE Emerging Index, a broad index of around 970 large and medium-sized emerging markets companies.

The fund is our favoured choice for investors who seek low-cost, broad exposure to emerging markets. It invests in every stock in its benchmark index, which provides wide diversification and ensures it tracks the market as accurately as possible.

This fund combines exposure to the long-term growth potential of Asian markets, with a regular income.

The team at Newton maintain a relatively cautious outlook. Their focus on more defensive areas of the market proved a strain on performance in the latter half of 2016 as some more economically-sensitive sectors outperformed. The fund performed well over the course of the year as a whole, however. Newton has demonstrated a commitment to long-term investing in the Asian region and, in our view, the team adopt a sensible investment approach that could lead to good long-term returns. The fund does not currently feature on the Wealth 150 as we have greater conviction in other Asian income funds. The fund is a concentrated portfolio of 45 stocks, which means each investment can have a significant impact on performance but this is a higher-risk approach.

James Donald favours undervalued areas of the market, which he believes will deliver high and sustainable levels of profitability.

Following a difficult couple of years, the fund delivered strong returns in 2016, which our analysis attributes to strong stock selection and a bias towards some of the region’s best-performing countries, such as Brazil and Russia. The fund is managed by an experienced emerging markets investor and, while we view the fund as a sensible choice for broad exposure to the emerging markets, we are currently happy with our existing line up of funds in this sector on the Wealth 150.