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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 - Senior Investment Analyst
9 January 2019

The Asian and emerging markets cover a broad range of countries. From Asia and Eastern Europe to South Africa and Latin America, each area is at a different stage of economic development. Some are rich in commodities and natural resources; some rely on exporting goods to Western economies; and others have a vibrant consumer-driven society.

These markets have grown rapidly in recent decades. As young, emerging economies, they tend to offer greater growth opportunities than the West. This means they’re higher risk and more volatile though.

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 focus on more mature 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 have gone from strength to strength.

Rapid industrialisation, growing populations, and a desire to succeed have helped transform developing countries into economic superpowers. Domestic consumption is set to be a key driver of growth over the coming years, helped by a young and growing population, and rising wealth.

These countries have also become hotbeds of innovation. Some countries are at the forefront of technology and in some cases companies located there are overtaking Western competitors.

Our analysis suggests there’s a reasonable amount of value on offer in these markets at the moment. So it’s possible to buy shares at a good price compared with their future growth prospects. This relies on companies to continue to grow their earnings though.

Asian and emerging countries are quite different from each other, so this part of the world can be home to both the best and worst-performing global stock markets at any one time. That’s why we think a diversified approach is sensible when it comes to investing in these markets.

If you’re looking to invest in these markets for the first time we think 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’d prefer to leave it to experienced investors to pick the funds. It has a core of funds that invest more broadly across the region. The managers then add funds focused on a more specific area if they find an exciting investment opportunity. This extra layer of management means there are additional charges with running a multi-manager fund. The fund is managed by our sister company, HL Fund Managers. It invests in companies of all sizes, including higher-risk smaller companies.

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 50

It’s been a volatile year for most global markets. The broad emerging stock market fell 1.4%* over the past year, while the Asian market lost 2.9%.

A US-China trade war is probably one of investors’ most obvious concerns. Slowing growth and rising debt in China also hasn’t helped. Neither has the strength of the US dollar against other currencies. Emerging economies have a lot of dollar-denominated debt, and if the dollar continues to strengthen it would make it more expensive to pay off these debts.

Asia and emerging stock markets - one year performance

Past performance is not a guide to future returns. Source: *Lipper IM, correct as at 30/11/2018.

So far China’s been the main target of US President Trump’s new trade policies. It’s worth remembering China’s more focused on domestic consumption than export-driven growth than it used to be. So the tariffs will have some impact, but they might not be as severe as some people think.

We think China’s massive debts could be more of a concern. It needs to curb its debt surge and let growth slow to a more sustainable level. Otherwise it risks a crisis. It’s impossible to call when or if this might come to a head, but it’s worth bearing in mind the risks when it comes to investing in these markets.

Over the longer term these markets have performed exceptionally well and we’re excited about the long-term opportunities that lie ahead. Domestic consumption is expected to grow over the coming years and should be one of the main contributors to the region’s development. Ecommerce and technology is likely to play a big part in this. It means companies can sell their products and services to a wider pool of people and this creates huge opportunities.

Performance will be volatile at times though and investors must be willing to ride out the uncertainties along the way.

Annual percentage growth
Nov 13 -
Nov 14
Nov 14 -
Nov 15
Nov 15 -
Nov 16
Nov 16 -
Nov 17
Nov 17 -
Nov 18
FTSE Asia Pacific ex Japan 9.4% -7.6% 31.7% 19.6% -2.9%
FTSE Emerging 10.0% -14.1% 32.9% 18.4% -1.4%

Past performance is not a guide to the future.Source: Lipper IM to 30/11/2018.

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

    +54.6%

  • FTSE Emerging

    +46.5%

Data correct as at 30/11/2018. Please remember past performance is not a guide to future returns.

Our favourite funds in the sector

We regularly review all the main investment sectors. Here we provide comments on a selection of funds in the Asia and emerging markets sectors. They're provided for your interest but are not a guide to how you should invest. If you're unsure if an investment suits your circumstances seek personal advice. Comments are correct as at December 2018.

These funds invest in emerging markets, which are 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 you could get back less than you 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 50. There is a tiered charge to hold funds with HL. It is 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 50.

Source for performance figures: Financial Express

This fund invests across a range of emerging countries and mainly focuses on larger companies. The managers look for companies they think will grow earnings sustainably.

The fund performed slightly worse than the broad emerging stock market over the past year. A large part of the fund is invested in Chinese companies, and this held back performance as the Chinese stock market was weaker than others . The fund mainly invests in larger firms, but there are some investments in medium-sized companies too. The managers think these companies have better growth prospects and could help the fund’s long-term performance, though there are no guarantees and past performance isn’t a guide to future returns.

This fund focuses on some of Asia’s largest businesses. The team look for companies in good financial health, run by robust and trustworthy management teams.

It’s been a fairly good year for the fund and it’s done better than the broad Asian stock market. Our analysis shows the managers have invested in companies that’ve performed well regardless of what sector or country they’re in. A large part of the fund is still invested in the financials sector because the managers think they’ll benefit from increased demand from private consumers for financial products and services. The team have previously shown they’re able to pick some of Asia’s strongest-performing companies. They also have a lot of experience, so we think the fund could perform well over the long run. There are no guarantees though.

Countries such as Brazil, Mexico and Chile mainly feature in this fund. The managers currently focus on companies that could benefit from domestic consumption.

Latin American stock markets got off to a tough start to the year. They’ve done a bit better in recent months, partly helped by the region’s largest market in Brazil. It got a boost after the election of far-right leader Jair Bolsonaro as President. The managers think Latin America’s long-term potential lies in the rising wealth of its middle class. So they’ve focused on companies that could benefit from increased spending, such as mall owners and banks. The risks are greater when investing in a specific area of the developing world, so a long-term investment horizon is essential.

Our favoured choice for investing purely in Indian companies. A focus on small and medium-sized companies makes this fund different from its peers focused on large businesses, though it increases risk.

Small and medium-sized Indian companies haven’t performed as well as larger businesses over the past year. This held back the fund’s performance. Some investments in the financials sector also haven’t helped. Avinash Vazirani is confident about their longer-term prospects because the Indian government is trying to increase the number of people with access to financial products and services. The fund’s also had some individual stock issues, including an investment in oil company Hindustan Petroleum. Overall the manager has aimed to invest in companies he believes will benefit from the significant change currently taking place in India, but this will be a gradual process. We’re encouraged by the manager’s longer-term track record and think he’ll identify some of India’s most successful companies over the long run. There are extra risks when investing in a single emerging country though.

This fund aims to track the performance of the FTSE World Asia ex Japan Index. This includes a broad range of companies from across the region.

The fund invests in around 570 larger companies based across Asia. This includes developed Asian countries such as Australia and Hong Kong, as well as less mature economies such as Taiwan and Malaysia. It’s tracked its index tightly and efficiently since its launch in 2005.

A fund that invests in companies listed in China, Hong Kong and Taiwan. The manager likes companies with a well-known brand and management team that have a great track record of running a business.

It’s been a volatile year for the Chinese stock market and it’s fallen in value. The fund has fallen in value too but it’s held up better than the market. Investments in China Merchants Banks and Taiwan Semiconductor Manufacturing, which makes components for smartphones, performed well this year. The fund has tended to be less volatile than the broader Chinese stock market and the manager has built a good long-term track record. The fund will fall as well as rise in value though so investors could get back less than they invest, and past performance isn’t a guide to future returns. This fund invests in smaller companies which adds risk, as does the focus on a single country.

Broad exposure to the emerging markets, but with a focus on larger firms. Management teams must have a long-term outlook, rather than only trying to make short-term gains.

The shares of large Chinese technology companies have performed well over the past few years. But the managers have tended to avoid these businesses, so the fund hasn’t benefited from the rising share prices. A focus on consumer goods companies, which haven’t performed quite so well, also hasn’t helped. But over the longer term they could benefit from rising wealth and increased consumer spending across the emerging markets. Past performance isn’t a guide to future returns. We think the fund has the potential to perform well over the long run, but it doesn't currently feature on the Wealth 50. This is because Aberdeen want to keep the fund a manageable size and have applied a 2% initial charge to invest in it.

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First State Asia Focus - one of 2018's best Asian funds

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Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

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