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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
26 February 2018

The Asian and emerging markets cover a broad range of countries. 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.

These markets have undergone rapid economic growth and industrialisation in recent decades. 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.

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

Our view on the Asia & Emerging Markets sector

Asian and emerging markets form a true economic powerhouse. Long-term growth across the region is underpinned by youthful and increasingly well-educated populations, rising domestic consumption, and an increasingly wealthy middle class.

These countries have also become hotbeds of innovation over the years. Some countries are at the forefront of technology and many companies located there are overtaking Western counterparts.

Asian and emerging stock markets performed well over the past year and this means the share prices and valuations of some companies are higher than they once were. That said, our analysis suggests there is still a reasonable amount of value on offer, so it’s still possible to buy shares at a good price compared with their future growth prospects. Company earnings have also started to improve and this could bode well for long-term share prices.

We believe a diversified approach is sensible when it comes to investing in these markets. 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 looking to invest in 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 a portfolio for additional exposure to a particular theme, area, or country.

The HL Multi-Manager Asia & Emerging Markets Fund is available for investors who would prefer an experienced investment manager to pick a range of funds on their behalf. It contains a core of funds that offer diversified exposure to the region, while the managers will add funds focused on a more specific area if they identify a compelling investment opportunity. Please note there are additional charges associated with running a multi-manager fund. The fund is managed by our sister company, HL Fund Managers.

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

Asian and emerging countries were home to some of the world’s best-performing stock markets over the past year. Against an improving global economic backdrop, investor sentiment towards the region has seen a resurgence to the benefit of share prices.

The share prices of technology companies drove much of this return as investors grew increasingly optimistic over their future growth prospects. A number of larger Chinese internet businesses, such as Tencent and Alibaba, were particularly strong.

Funds with a bias towards this area of the market delivered handsome returns. Those with less exposure still tended to deliver attractive returns, but missed out on some of the stronger gains made in the technology sector.

Some investors suggest the higher prices of these companies is justified because they are profitable and generate good levels of cash. Others argue prices have risen too far, too fast – if future earnings growth does not meet investor expectations, their share prices could be vulnerable to a setback. Given corporate governance has historically been questionable in emerging markets, some investors are also wary as these companies tend to be run by management teams with shorter track records than more-established firms.

Asia, emerging markets and technology sector- one year performance

Past performance is not a guide to future returns. Source: Lipper IM, correct as at 31/01/2018.

Over the longer term these markets have performed exceptionally well, although this has been interrupted with periods of significant volatility and the risks should not be overlooked. The region still faces a number of challenges, including mounting debt levels in China and political turmoil in some countries.

Our view of the longer-term prospects remains intact. A number of countries, such as India, are undergoing significant economic and political reform. The full effects will not occur overnight, but we are encouraged by some of the changes taking place. There are also signs corporate governance is improving, while company earnings are also on the rise. The long-term growth potential is significant, but a long investment horizon is essential to ride out the inevitable ups and downs and there are no guarantees.

Annual percentage growth
Jan 13 -
Jan 14
Jan 14 -
Jan 15
Jan 15 -
Jan 16
Jan 16 -
Jan 17
Jan 17 -
Jan 18
FTSE AW Asia Pacific ex Japan -8.0 21.4 -12.4 39.2 20.6
FTSE Emerging -15.0 20.0 -16.7 43.3 22.0

Past performance is not a guide to future returns. Source: Lipper IM to 31/01/2018

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

    +64.2%

  • FTSE Emerging

    +48.4%

Data correct as at 31/01/2018. Please remember past performance is not a guide to future returns.

Our favourite funds in the sector

We undertake a comprehensive review of all the major sectors and here we provide comments on a selection of funds in this sector. 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 2018.

These funds invest in emerging markets, which tend to be higher risk than developed markets. For more information, please refer to the Key Investor Information for the specific fund. 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 is run by a conservative management team and invests broadly across Asia. It mostly invests in larger companies, as well as a selection of medium-sized businesses with superior growth prospects.

The fund is a relatively new addition to the Wealth 150+ and we’re excited about its long-term prospects. First State has a long and successful history investing in the Asia Pacific region. Martin Lau and his team invest in companies with strong cash flows and an ability to keep costs under control. They like companies run by trustworthy management teams whose interests are aligned with shareholders. We have long admired this disciplined investment approach and believe it should serve investors well over the long run, though there’s no guarantee. The fund is also small and nimble in size, which means the team can pounce on opportunities quickly, wherever they may lie.

Stewart Investors is home to a highly-experienced Asian equities team. They focus on larger, high-quality companies with healthy finances and robust cash flows, run by responsible management teams.

A focus on companies with more sustainable growth prospects means this fund tends to hold up well in weaker markets. That said, it may lag the performance of the broader Asian stock market when share prices rise rapidly and this has been the case over the past couple of years. The team have also tended to avoid Chinese internet businesses, which have performed well, because they don’t meet the strict quality criteria or high levels of corporate governance the team seeks in a company. Over the long run this approach has proven a success and we continue to rate the team highly.

This fund aims to combine Asia's exciting growth potential with its burgeoning dividend culture in a single portfolio. It pays a regular income and is focused on larger companies in developed Asian markets, including Australia.

It has been a challenging few years for the fund. Its aim to produce a regular income means the manager typically focuses on higher-yielding areas of the market. This has led to a bias towards the financial sector, including a number of property-related companies, but stocks in this area have been weaker and detracted from returns. Many investors have instead favoured companies focused on higher rates of growth, rather than paying out dividends to shareholders, such as those in the technology sector. We maintain our conviction in the manager and believe his focus on companies with the potential to grow their earnings and dividends will pay off over the long term. He invests in a small number of companies, which means each one can have a real impact on performance, but this can increase risk.

Please note the fund can take charges from capital, which boosts the yield, but reduces the potential for capital growth.

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.

This fund mainly invests in Asian and emerging countries, but also has the flexibility to invest in businesses based in developed markets that earn most of their profits in emerging economies. The fund is currently biased to consumer companies. A rising middle class means household spending in Asian and emerging countries is growing and these companies could benefit from increasing consumption. We view the combined exposure to some of the world’s most innovative smaller companies with the long-term growth potential of Asian and emerging markets as an exciting prospect. Matthew Dobbs has a successful track record investing in this region, although there are no guarantees of future performance.

This fund aims to track the performance of the FTSE Emerging Index – a broad index of almost 1,000 large and medium-sized emerging markets companies.

The fund is our favoured choice for investors who seek a low-cost, passive alternative to investing in the emerging markets. It invests broadly across many countries in the region, including Taiwan, India, Russia, and Brazil. It invests in every stock in its benchmark index, which provides wide diversification and ensures it tracks the market as accurately as possible.

James Donald looks for companies he believes offer good value and will deliver high and sustainable levels of profitability. He typically focuses on larger companies.

The manager uses a value-oriented approach to investing, which means he tends to focus on companies that are overlooked by other investors and can be bought at a share price below the company’s true worth. This leads him away from areas of the market he believes are overvalued, such as China’s biggest technology companies. Similar to a number of other emerging markets funds, the fund has therefore missed out on some of the gains made in this area. James Donald is an experienced emerging markets investor and he has delivered good periods of performance in the past. That said, we are currently happy with our existing line up of funds in this sector on the Wealth 150+.

This fund invests in some of India’s largest businesses. The investment team seek quality companies with financial strength, which are run by shareholder-friendly management.

The emerging markets team at Aberdeen is one of the most experienced in the industry, in our view. They have built a good track record on this fund and our analysis suggests performance has largely been driven by allocating the fund towards some of India’s strongest-performing sectors. We expect the team to deliver good long-term returns, although we currently favour funds that have delivered performance through picking individual stocks that have gone on to perform well, regardless of which sector they’re in. The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.