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Asia & emerging markets quarterly fund review – China’s education crackdown

We look at how Asian and emerging markets have recently fared, the regulatory crackdown in China, and how funds investing in the region have performed.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Asian and emerging markets have followed a different path this year compared with 2020.

Last year lots of eastern economies were on the front foot in handling the coronavirus crisis. The Covid-19 outbreak originated in China, but the country took swift action to contain the virus. China had a stronger year for both economic and stock market growth compared with many other major global markets. It was a similar story for some other Asian markets.

More recently, Asian and emerging markets have run into some difficulties. An outbreak of the Delta variant in China has led to concerns over its growth prospects and supply chain disruption. The country’s authorities have previously battled a series of small-scale outbreaks, but this more infectious variant is likely to be a challenge. On the positive side, it’s spurred an acceleration of China’s vaccination rate. 

Other developing countries with lower vaccination rates have also seen a surge in infections. The Delta variant is now the dominant strain in countries like Indonesia, South Africa, Tunisia and Mexico. It’s led to a rise in cases and deaths.  Unfortunately, these countries are also far behind Western economies in terms of vaccine rollout.

New mutations could continue to gradually drive out old ones, and the question now is how much vaccine support the West is prepared to provide to poorer countries. Without it, future variants could remain difficult to contain, and ultimately hamper economic prospects.

This article isn’t personal advice. If you're not sure if an investment is right for you, ask for financial advice. 

China’s education crackdown

The Chinese government’s often heavy-handed approach to policy and regulation is nothing new. But it can still be unpredictable and catch investors by surprise.

Last year it was China’s internet platforms that felt the brunt, but this time the crackdown was seen in the education sector. It recently announced all companies offering private tutoring services must register as non-profit institutions. They can no longer accept foreign investment, and tutoring will be prohibited on weekends, public holidays and school breaks.  After the news broke, many of China’s private education companies, including TAL Education and New Oriental Education, saw swift share price falls.

It hasn’t been comfortable for those investing in China, but there’s a clear reason behind the action.

Like other global economies, China’s seen rising inequality amid the pandemic. It’s accelerated its efforts to promote healthy living and social harmony.

After-school tutoring was becoming a normal part of every child’s schedule, so the government’s aimed to relieve the economic and mental burdens on students and their families.

China’s also looking at whether consumer and employee rights are being overlooked in favour of corporate profits. There’s been increasing emphasis on reining in some of China’s biggest companies.

The outlook for education companies remains uncertain. The recent crackdown has also raised concerns about risks in other sectors, including Chinese internet companies that have proved highly successful in recent years.

In some ways, China’s regulators are behind the curve and now playing catch up with regulation implemented by the world’s more mature economies. The authorities still want to promote innovation and entrepreneurship. But they want to see healthy competition too, and make sure the next generation of innovators has space to flourish and add to China’s economic prosperity.

We can expect more change from China’s regulators in the future. And stock markets are likely to be volatile when regulations change. Alongside tech and education, areas like healthcare and property could see intervention at some point too. If, and when, this might happen is difficult to call though.

If anything, the latest round of intervention is a reminder of the political and regulatory implications that are there across all emerging markets. Investors should always be prepared when investing in these potentially high-growth, but higher-risk, markets.

Read more about how to spread risk with diversification

What’s the market impact?

It’s little surprise the recent policy announcements from China had an impact on its stock markets. The broader market fell sharply in July, and so far this year it's fallen 13.8%* in sterling terms to the end of July 2021. It’s a far cry from the hefty gains made in 2020. As always, past performance isn’t a guide to future returns.

Over the past year, the FTSE China index has lost 4.9%. Most other Asian and emerging markets have made money over this time, with the FTSE Asia Pacific ex Japan and FTSE Emerging indexes growing 15.6% and 12.6%, respectively.

South Korea’s market has been one of the strongest over this time, rising 40.9%. The FTSE India isn’t far behind with gains of 38.2%, despite having to deal with a second wave of the virus earlier in the year. Most of its economy stayed open this time around, which meant businesses weren’t put under so much pressure.

Past performance is not a guide to the future. Source: *Lipper IM, to 31/07/2021

Name % Growth % Growth % Growth % Growth % Growth
31/07/2016 To 31/07/2017 31/07/2017 To 31/07/2018 31/07/2018 To 31/07/2019 31/07/2019 To 31/07/2020 31/07/2020 To 31/07/2021
FTSE Asia Pacific ex Japan 23.8 5.9 5.5 1.9 15.6
FTSE China 32.6 8.9 2.0 17.5 -4.9
FTSE Emerging 22.4 5.7 7.7 -1.1 12.6
FTSE India 24.2 5.6 0.9 -8.6 38.2
FTSE Korea 31.9 -0.4 -6.9 7.8 40.9

Past performance is not a guide to the future. Source: Lipper IM, to 31/07/2021

Latin American markets have grown 19.5% over the year, while the eastern European (including Russia) market also bucked last year’s trend and rose 29.9%.  A rising oil price has helped the oil exporting countries in these regions.

Markets are likely to still be volatile at times though. Especially as most countries are battling rising infection rates or haven’t been able to rollout their vaccination programmes quickly enough. Some have been forced into fresh lockdowns, which puts the brakes on lots of businesses.

Over the longer term we expect these markets to offer lots of growth potential. But, at least for now, we’ll probably see more tough terrain for investors to navigate.

How have Wealth Shortlist funds performed?

Asian and emerging markets Wealth Shortlist funds have delivered mixed performance over the year. We usually expect this. A range of managers with different strengths, styles and areas of focus will perform differently. Remember, past performance isn’t a guide the future, and performance here is over a short time period.

All investments fall as well as rise in value, so you could get back less than you invest. For more details on each fund and its risks, please see the links to their factsheets and key investor information below. 

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified  portfolio.

The Stewart Investors Indian Subcontinent Sustainability and Jupiter India funds were the two best-performing Wealth Shortlist funds in these sectors over the past year. They benefited from the strength of the Indian stock market, though both performed better than the market. Our analysis shows investments in medium-sized companies also boosted performance.

Find out more about Stewart Investors Indian Subcontinent Sustainability, including charges

Stewart Investors Indian Subcontinent Sustainability Key Investor Information

Find out more about Jupiter India, including charges 

Jupiter India Key Investor Information

JPMorgan Emerging Markets was a weaker performer, falling behind its peers in the IA Global Emerging Markets sector. It still grew 15.2%* over the year and beat the performance of the FTSE Emerging index. Our analysis suggests investments in Chinese education provider New Oriental Education and tech companies Alibaba and Tencent have hurt recent performance. However, the managers have years of experience and a strong long-term track record.

Find out more about JPMorgan Emerging Markets, including charges 

JPMorgan Emerging Markets Key Investor Information 

Emerging markets could be an interesting place for investors prepared to accept the higher risks and ups and downs of investing there. We suggest taking a long-term view of at least 5-10 years.

Name % Growth % Growth % Growth % Growth % Growth
31/07/2016 To 31/07/2017 31/07/2017 To 31/07/2018 31/07/2018 To 31/07/2019 31/07/2019 To 31/07/2020 31/07/2020 To 31/07/2021
FTSE Emerging 22.4 5.7 7.7 -1.1 12.6
FTSE India 24.2 5.6 0.9 -8.6 38.2
JPMorgan Emerging Markets 25.6 4.3 16.1 5.2 15.2
Jupiter India 20.9 -11.5 -9.8 -17.6 43.0
Stewart Investors Indian Subcontinent Sustainability 15.8 9.1 2.0 -11.8 48.5

Past performance is not a guide to the future. Source: *Lipper IM, to 31/07/2021

How have other Asian and emerging markets funds performed?

Over the past year, the average fund in the IA Global Emerging Markets sector made 19.2%*, while the average fund in the IA Asia Pacific ex Japan sector grew 18.3%,  performing better than the Asian and emerging stock markets. As always, past performance isn't a guide to future returns.

Matthews Asia Small Companies was the best performing fund in the Asia sector. The fund got a boost from its focus on Asian smaller companies, which did better than larger firms. Janus Henderson Asian Dividend Income remains at the bottom of the Asian performance table. As an income fund it has a value focus. So-called 'value' investors often aim to uncover hidden gems – companies whose share prices don’t necessarily reflect their actual worth or earnings potential. This is a style that hasn’t always been in favour over the past year, though our analysis suggests the manager’s stock-picking has been weaker too.

Find out more about Matthews Asia Small Companies, including charges 

Matthews Asia Small Companies Key Investor Information

Find out more about Janus Henderson Asian Dividend Income, including charges

Janus Henderson Asian Dividend Income Key Investor Information

M&G Global Emerging Markets has moved up the table to take the top spot in the emerging markets sector. This fund has some investments in small and medium-sized companies, and it also has less invested in China than some peers and the benchmark.

Find out more about M&G Global Emerging Markets, including charges 

M&G Global Emerging Markets Key Investor Information 

On the other hand, MI Somerset Emerging Markets Discovery has fallen to the bottom of the table. The fund focuses on higher-risk small and medium-sized companies, though it hasn’t benefited enough from the strong growth in these companies over this time.

Find out more about MI Somerset Emerging markets Discovery, including charges

MI Somerset Emerging Markets Key Investor Information 

Name % Growth % Growth % Growth % Growth % Growth
31/07/2016 To 31/07/2017 31/07/2017 To 31/07/2018 31/07/2018 To 31/07/2019 31/07/2019 To 31/07/2020 31/07/2020 To 31/07/2021
IA Asia Pacific ex Japan 22.8 5.1 7.6 -0.3 18.3
IA Global Emerging Markets 24.1 2.8 7.7 -3.9 19.2
Janus Henderson Asian Dividend Income 17.0 4.2 10.3 -11.5 5.7
Matthews Asia Small Companies 13.8 9.4 1.9 11.3 46.0
M&G Global Emerging Markets 21.9 0.7 11.6 -21.5 31.0
MI Somerset Emerging Markets Discovery n/a n/a n/a n/a -3.3

Past performance is not a guide to the future. *N/A means no data available for this time period. Source: Lipper IM, to 31/07/2021

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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