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Investing in emerging markets

In this special report we consider the economic outlook for emerging markets, as well as ideas on how to invest.

Important - The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. The information shown is not personal advice, if you are unsure of the suitability of an investment for your circumstances please contact us for personal advice. Once held in a SIPP money is not usually accessible until age 55 (rising to 57 in 2028).

Nadeem Umar

Research Editor

The economic outlook

We’ve talked a lot about investment opportunities in the developing world over the years. Most developing countries have a youthful, expanding workforce. It’s one of the factors we think will drive their long-term growth. And economic growth creates wealth.

A rising middle-class means more consumer spending. The more people spend, the more opportunities businesses have to prosper. As companies grow and become more profitable they can pay their employees better. It’s a virtuous circle.

The International Monetary Fund (IMF) predicts growth in India and China of 7.7% and 6.6% respectively this year. That compares to just 2.1% and 1.7% in the US and UK. India and China look set to overtake the US to become the world’s two largest economies, by 2050.

But it’s not a two horse race.

Developing economies across the world are catching up with the West. In fact, those that look set to climb furthest up the global economic rankings by 2050 are Vietnam, the Philippines and Nigeria.

The IMF expects emerging markets to grow 4-5% in each of the next five years. In contrast, developed economies aren’t expected to break the 2% mark, on average. Of course like all forecasts these figures are not guaranteed.

Average expected GDP growth % p.a to 2050 (in domestic currency)

Source: PWC, the world in 2050

Building on the banks

It isn’t just the countries’ eager and growing workforce that’s driving growth. Up-and-coming economies have been laying the foundations for more stable financial services sectors, and for good reason.

India recently took most of its cash out of circulation, forcing the public to get familiar with the banking industry. When people save, banks can lend to other people and businesses. This can be a huge accelerant for growing companies.

But India needed the logistics to make it possible. The ‘Aadhaar’ programme now has a database of biometric data on 1.2 billion people. It’s made it easy to verify someone’s identity, and companies like HDFC Bank have benefited by opening huge numbers of bank accounts as a result of the reform.

It’s examples like this that have led to financial companies making up 24% of the MSCI Emerging Markets index.

Three UK shares with exposure to emerging markets

Investing in infrastructure

The developing world’s ambition isn’t limited to financial infrastructure either.

China’s belt and road project is a massive effort to improve land and sea routes across Asia, the Middle East, Africa and Europe. A new system of roads, bridges and ports will make trading easier and more efficient.

It’s got the potential to boost cooperation and growth sustainably.

There’s been some concern about trade prospects in emerging markets if President Trump’s latest steel tariff proposals come in to play. But while the US looks to close trade doors and focus on its domestic economy, emerging markets are headed in what we think is the right direction.

We see great potential in emerging markets, but there’s no doubt investing here is a higher-risk approach, so it’s important to take a longer-term view.

In this report we look at three funds and three shares you could consider for investing in emerging markets.

Dominic Rowles

Investment Analyst

HL Multi-Manager Asia and Emerging Markets

When investing in emerging markets, the sheer scale and variety of opportunities on offer can be hard to navigate. Different regions and types of company will perform well at different times, and fund managers often have very different approaches.

This means they won’t necessarily perform well at the same time. Choosing just one fund to invest in this higher-risk area probably won’t spread your money across enough different investments.

Building and maintaining a diversified but well-balanced portfolio of funds isn’t easy. That’s why we launched the HL Multi-Manager Asia & Emerging Markets Fund three years ago. It lets you leave the hard work to us.

The fund is invested with our favourite fund managers, who in turn invest in a selection of companies from both emerging markets and developed Asian countries. They cover companies of all sizes, from large multinationals to higher-risk smaller companies.

We’re especially positive on the latter, as we think fund managers in this area have the greatest potential to add value by uncovering hidden gems.

Read transcript

There are few holdings in large Chinese technology companies like Alibaba and Tencent. These have performed well recently, and it meant the fund missed out on some of these gains. Lots of our favoured fund managers are cautious on these firms, citing concerns over how well they’re run.

We think the work involved in running the fund – and the potential results – more than justify the additional costs associated with a multi-manager approach.

Indeed the fund has delivered an attractive return of 26.2% since launch three years ago.

Three years is a short space of time when it comes to investing, but we’re encouraged by the strength of our underlying managers’ longer-term records. Remember past performance isn’t a good guide to the returns you’ll receive in future. Like all stock market investments the fund can fall in value, so you could make a loss.

HL Multi-Manager Asia & Emerging Markets - performance since launch

Past performance isn’t a guide to the future. Source: Lipper IM to 30/04/2018

Annual percentage growth
Apr 13 -
Apr 14
Apr 14 -
Apr 15
Apr 15 -
Apr 16
Apr 16 -
Apr 17
Apr 17 -
Apr 18
HL Multi-Manager Asia & Emerging Markets n/a* n/a* -7% 30.1% 4.3%
FTSE Emerging -10.7% 22.4% -13.4% 34.9% 11.5%

Past performance isn’t a guide to the future. Source: Lipper IM to 30/04/2018

*Full year performance data not available

Their focus on high-quality businesses means we’d expect the fund to hold up well when emerging markets are weaker, but potentially underperform a rapidly rising market. This has been the case over the past few years.

In summary we think the fund is a great way to invest in some of the fastest growing regions of the world, particularly if you lack the time or inclination to choose your own underlying investments, and would rather leave the hard work to our experts.

The HL Multi-Manager Asia & Emerging Markets Fund is managed by our sister company, HL Fund Managers Ltd.

More information about this fund including charges

HL Multi-Manager Asia & Emerging Markets Key Investor Information

Invest in HL Multi-Manager Asia & Emerging Markets

More fund ideas

HL Multi-Manager Asia & Emerging Markets

Invest now

Richard Troue

Head of Investment Analysis

Jupiter India

If you’re after a more focused investment in emerging markets, India looks a great opportunity.

It’s got the second-largest middle class in the world and an increasing proportion of the population now have the means to open a bank account. Banks, asset managers, and insurance companies could all benefit as more people save and direct money to these companies.

And it doesn’t stop there.

Between 2017 and 2020 disposable income is set to increase by 55%. With a growing economy and an enormous, increasingly wealthy, consumer base Indian businesses are poised to reap the benefits.

Jupiter India is our favourite fund for investing in India. It was launched in 2008 by Avinash Vazirani, who has a stellar track record investing in Indian companies, spanning over two decades. Vazirani looks for companies he thinks will deliver long-term growth and can be bought at a fair price.

To invest in the anticipated rise of India’s finance industry, for example, Avinash Vazirani has chosen companies such as Reliance Capital, State Bank of India, and ICICI Prudential Life Insurance, which could all benefit from recent changes.

Avinash Vazirani – career track record

Past performance isn’t a guide to the future. Source: Lipper IM to 30/04/2018

Annual percentage growth
Apr 13 -
Apr 14
Apr 14 -
Apr 15
Apr 15 -
Apr 16
Apr 16 -
Apr 17
Apr 17 -
Apr 18
Jupiter India -6.1% 46.9% 4.5% 54.4% -8.7%
FTSE India -5.5% 31.5% -1.0% 41.2% 5.7%

Past performance isn’t a guide to the future. Source: Lipper IM to 30/04/2018

The fund has performed well over the longer term. In the past five years it gained 104% compared to 84% for the Indian stock market, although there’s no guarantee this impressive record will continue. The fund will fall in value at times, so you could lose money.

India has the potential to become the world’s next economic marvel. With a talented fund manager at the helm, we think Jupiter India is well-positioned to take advantage of the opportunity.

Like all emerging markets, India’s a higher-risk area to invest in. So it’s important to take a long-term view, and be prepared to ride out the inevitable ups and downs.

More information on this fund including charges

Jupiter India Key Investor Information

Invest in Jupiter India

Jupiter India

Invest now

Kate Marshall

Senior Investment Analyst

iShares Emerging Markets Equity Index - A passive option

For those looking to invest right across emerging markets, we suggest taking a closer look at the iShares Emerging Markets Equity Index Fund. It invests in hundreds of companies in over 20 countries, from China and India, to Brazil and Mexico with the aim of tracking the FTSE All-World Emerging Index, at a low annual cost.

Technology and financials are two of the biggest industries in emerging markets, so they feature heavily in the fund. Both areas performed well over the past few years and boosted returns for investors - the fund’s grown 28% in three years. Performance was particularly strong amongst large technology businesses, with Chinese internet giants Alibaba and Tencent leading the charge, although past performance shouldn’t be seen as a guide to future returns.

We think the fund’s ongoing charge of 0.23% p.a. is attractive, especially given the broad diversification offered by the fund. A low annual management charge is key with tracker funds, as charges can have a big impact on long-term performance. Our charge to hold funds (maximum 0.45% per year) also applies.

iShares Emerging Markets Equity Index - five year performance

Past performance isn’t a guide to the future. Source: Lipper IM to 30/04/2018

Annual percentage growth
Apr 13 -
Apr 14
Apr 14 -
Apr 15
Apr 15 -
Apr 16
Apr 16 -
Apr 17
Apr 17 -
Apr 18
iShares Emerging Markets Equity Index -10.4% 19.9% -14.1% 33.7% 11.4%
FTSE Emerging -10.7% 22.4% -13.4% 34.9% 11.5%

Past performance isn’t a guide to the future. Source: Lipper IM to 30/04/2018

More information on this fund including charges

iShares Emerging Markets Equity Index Key Investor Information

Invest in iShares Emerging Markets

Three UK shares with exposure to emerging markets

iShares Emerging Markets Equity Index

Invest now

George Salmon

Equity Analyst

Three UK shares with exposure to emerging markets

Emerging markets come with attractive growth prospects. But for those who like to buy individual shares, they can sometimes be hard to tap into.

Here I look at three UK-listed companies that could benefit from economic growth in Eastern Europe, and across Asia. We see some great long-term potential in these markets, but please remember they’re higher-risk.

Wizz Air

When you think of emerging markets you’d normally picture far-flung exotic shores. But lots are actually just a low-cost flight away.

Wizz Air is based in the emerging economies of Eastern Europe, and is one of Europe’s leading low-cost carriers. January’s third quarter revenues were up 24% to €423m, making it one of the fastest growing too.

Growth is coming from new routes, but with passenger numbers rising even faster, revenue per kilometre is taking off. At the same time, per seat non-fuel costs, which are among the lowest in the industry, are being held flat.

And we think Wizz could be capable of more.

There are currently around 4.5 times more passengers departing from Western European countries than from emerging European nations. With countries like Poland, Romania, Hungary and Bulgaria expected to deliver much higher growth than the UK and euro zone economies, there’s plenty of scope for that gap to narrow in the future.

The growth potential at Wizz hasn’t gone unnoticed. The shares are more expensive than many peers in the sector, and that means the group needs to operate smoothly in the cyclical airline business. With the group focused on growth, investors shouldn’t expect any dividends to smooth the ups and downs in the short term.

European growth stories are reasonably thin on the ground in the UK market, and stocks plugged in to the emerging economies of Central and Eastern Europe are even rarer. For those looking to benefit from the growth in these markets, we think Wizz Air is one of the more attractive options.

Wizz Air - operating profit


Past performance is not a guide to future returns. Source: Thomson Reuters Eikon as at 30/04/18

Wizz Air share price and charts

Rio Tinto

Cities across the world are swelling. Globally, the population in medium-sized cities nearly doubled between 1990 and 2014.

The pace of change in the developing world is especially startling. At the turn of the century, China had 58 cities with over 1m people. It now has 102, and is set to exceed 128 within the next seven years. All those people need places to live, as well as cars and trains to get around.

The steel works of industrial China are forging the new world, and it’s Rio fuelling the smelters.

Over the years we’ve seen how growth can be volatile. Investors who rode through the commodity ‘super-cycle’, only for the bottom to drop out, will know as much already.

But prices have bounced from the lows and Rio has patched up a balance sheet that was starting to look stretched. It’s also introduced a conservative policy of linking the dividend to earnings. This should help the group manage the cycle better.

Part of restoring the balance sheet saw Rio sell most of its coal assets, but as far as iron ore is concerned, it has some of the highest quality assets out there. At Pilbara, Western Australia, Rio can produce at $13.40 per tonne, comfortably below 2017’s prevailing price of over $60.

The attractive asset base should mean Rio is capable of delivering profits year-on-year, although of course there are no guarantees.

Rio Tinto share price, charts and research

Standard Chartered

Standard Chartered, which makes more than 80% of its income from Asia, Africa and the Middle East, is another company looking in better shape than in the recent past.

Key banking metrics are much healthier compared to just a few years ago and the company’s profitability targets are looking more achievable. And there’s clearly ambition to kick on from here in the longer-term.

All this means Standard Chartered’s confident enough to bring back the dividend after scrapping it back in 2015, and the prospective yield currently sits at 2.3%.

The ultra-wealthy still account for a small portion of the business, but the division is growing steadily and offers returns with limited risk, since lending tends to be well secured. There are cross selling opportunities too, not least into the Wealth division.

For all the progress Standard Chartered is certainly not without its risks. Banks are very sensitive to economic ups and downs, and, as Standard Chartered knows only too well, the ups and downs in emerging markets can be particularly volatile.

Standard Chartered share price, charts and research

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Why emerging markets?

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