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Asia & Emerging Markets quarterly fund review – India’s second wave

We look at how Asian and emerging markets have recently fared, the impact of rising coronavirus cases in India, 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.

There’s a big difference in the way countries have handled the coronavirus crisis.

Last year, parts of Asia were heralded as fine examples of how to handle a viral outbreak. Countries like China, Taiwan and South Korea seemingly had the virus under control relatively early in its tracks and were getting back to normality quicker than many other parts of the world.

Other emerging markets, including much of Latin America, struggled and sadly continued to see rising death tolls.

While western economies are now making strides with vaccine rollouts and the potential for a rebound in the economy, some Asian and emerging markets aren’t doing so well. Economic growth might be back to pre-pandemic levels in some cases, but slower growth is expected over the coming months.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, please ask for financial advice. Investments can rise as well as fall in value so you could get back less than you invest.

India’s Covid-19 surge

The most obvious recent casualty is India. The world’s second most populous nation is facing a severe new wave of the virus, with tragic consequences.

India’s second wave is almost three times as large as its first with a population of 1.3bn, the country has seen over 17m Covid-19 cases, while over 200,000 deaths have already been reported. There’s speculation that cases and deaths have been underreported, and the true number could be even higher.

The situation is worse this time around, partly due to India dealing with a new variant of the virus. While there’s currently no evidence to suggest this variant isn’t treatable by existing vaccines, there will clearly be a larger problem if this turns out not to be the case. Restrictions have also been looser in India in recent months, where mass gatherings hadn’t been prohibited, adding fuel to the fire.

Some restrictions around mobility have now been put back in place. Cases are dropping in some of India’s largest cities, like Mumbai, and the second wave could have already peaked in some states.

Last year’s national lockdown damaged India’s economy and people’s livelihoods, so most want to avoid this route again. Instead, the country is using regional lockdowns so economic activity can continue in areas less affected by the virus.

Lots of experts think vaccinations in India will continue in full force. But vaccines are the end game, and not necessarily the answer to the current crisis. More states might need to announce lockdowns if India is to bring down caseloads now.

Clearly, this will all have an impact on growth. In the second quarter of 2020 (April to June), there was a 25% contraction in economic growth. But this was more a result of lockdowns and a drop in household incomes, rather than high caseloads. The contraction in the second quarter this year is expected to be lower at around 5%, with a potential recovery in the second half of the year (providing cases continue to decrease).

Fund manager views

We recently had a video call with Sashi Reddy, manager of the Stewart Investors Indian Subcontinent Sustainability Fund. Reddy is mindful of the recent increase in Covid cases, and the devasting death toll. He thinks the news coming out of India will continue to be bad over the coming weeks.

In the short term, from an investment perspective, he thinks this outbreak could have the greatest negative impact on areas like banks, automotives and manufacturing. He doesn’t think the impact on the economy will be as bad as when the pandemic hit last year though, particularly as more people work remotely now. He’s also reasonably confident the vaccine programme will pick up over the next few months.

The manager continues to focus on businesses with good governance and corporate practices, including those that take care of their workers. But also those that could prove resilient in more turbulent times.

Read our latest research update on the Stewart Investors Indian Subcontinent Sustainability Fund

Avinash Vazirani, manager of the Jupiter India Fund, similarly believes that short-term economic growth will take a hit. He expects a bounce back in the latter half of this year, but growth for the whole year will be lower than initially predicted. He doesn’t think India’s longer-term growth will be impacted.

He notes India’s government has pledged to increase public sector spending on healthcare over the next three years. He expects Covid will accelerate the pre-existing trend of increased focus on health and wellbeing. In his fund, there’s a higher weighting to the healthcare sector than the Indian stock market, including hospitals, diagnostics and pharmaceutical exports.

India is still the world’s largest producer of vaccines and has recently allowed vaccine manufacturers to sell to both the government and private healthcare providers. Vazirani thinks this should improve the speed and efficiency of vaccine rollout. He also thinks India has the advantage of a young population and the fact that lots of elderly and vulnerable people have already had at least one dose of the vaccine.

What does this mean for markets?

India’s stock markets have been relatively calm recently, despite the uncertain backdrop. Over the most recent quarter since our last review (three months to the end of April 2021), the FTSE India Index has grown 6.7% compared with 1.3% for the FTSE Emerging Index and 1.9% for the FTSE Asia Pacific ex Japan Index*. Over one year, it’s grown 41.2%, while the emerging and Asian markets have grown 33.9% and 37.4%, respectively*. Past performance isn’t a guide to future returns.

Sector performance from 30 April 2020

Past performance is not a guide to the future. Source: *Lipper IM, to 30/04/2021

Annual percentage growth
April 16 -
April 17
April 17 -
April 18
April 18 -
April 19
April 19 -
April 20
April 20 -
April 21
FTSE Asia Pacific ex Japan 36.3% 11.5% 2.7% -5.6% 37.4%
FTSE Emerging 34.9% 11.5% 3.2% -8.7% 33.9%
FTSE India 41.2% 5.7% 6.5% -17.9% 41.2%

Past performance is not a guide to the future. Source: *Lipper IM, to 30/04/2021

Markets have been volatile over this time though, and we shouldn’t forget the significant setback seen early last year. If the coronavirus crisis continues, vaccines aren’t rolled out quickly enough, or India’s forced to implement further lockdowns that could stunt economic and business activity. We could then see more market volatility.

While the virus adds a layer of complexity and unpredictability, we think India has a lot of stored up growth potential. Its demographics are attractive, with a young, aspirational population, and the Indian market is wide, diverse and innovative.

Looking more broadly across the region, the Korean, Taiwanese and South African markets have been some of the strongest performers over the past year. China had previously held up well, but it’s come off the boil more recently. That’s partly as some of its larger tech companies with high growth expectations have fallen back after strong performance last year.

Thailand has been one of the weakest markets in this region over the past year. The country has suffered weaker economic growth and hasn’t seen as much of a recovery in exports compared with other Asian countries. On top of that, multiple waves and variants globally has put the brakes on a tourism recovery. That said, Thailand’s market has still grown over the past year.

How have Wealth Shortlist funds performed?

Asian and emerging markets Wealth Shortlist funds have delivered mixed performance over the year. We usually expect this though, because it's in line with how we select funds. If all funds in each sector perform well at the same time, they're probably investing in similar areas. Those same areas won't perform well all the time, so it can be painful when they're out of favour.

We prefer to take a diversified approach by choosing a range of managers who have a variety of strengths, styles and areas of focus. Remember, past performance isn’t a guide the future, and performance stated here is over a short time period.

Investing in the funds mentioned in this article 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.

Schroder Small Cap Discovery was the best-performing Wealth Shortlist fund over the past year in this sector. It focuses on higher-risk small and medium-sized companies across the Asian and emerging markets. Our analysis shows strong stock-picking has boosted performance. The managers have invested in companies that are performing well, regardless of their size, where they’re based, or what sector they’re in.

Jupiter India has had a weaker year, partly as its slight value tilt and some weaker stock selection held back performance last year. The fund has performed better in more recent months though, helped by the value style returning to favour, as well as investing in higher-risk small and medium-sized companies. We think the fund offers diversification from other Indian and emerging markets funds. The manager has many years of experience of investing in undervalued, overlooked companies, with growth potential.

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

Annual percentage growth
April 16 -
April 17
April 17 -
April 18
April 18 -
April 19
April 19 -
April 20
April 20 -
April 21
Jupiter India 53.2% -9.3% -9.1% -24.4% 26.6%
Schroder Small Cap Discovery 30.7% 3.5% -3.1% -16.8% 52.5%

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2021

More on Jupiter India including charges

Jupiter India key investor information

More on Schroder Small Cap Discovery including charges

Schroder Small Cap Discovery key investor information

How have other Asian and emerging markets funds performed?

Over the past year, the average fund in the IA Global Emerging Markets sector made 38.4%*, meaning the average fund in the sector has performed better than the emerging stock market. The average fund in the IA Asia Pacific ex Japan sector grew 37.4%*, meaning the average fund has matched the performance of the Asian market. As always, past performance isn't a guide to future returns.

Baillie Gifford Pacific and FP Carmignac Emerging Markets sit at the top of the Asia and emerging markets performance tables over this time. They typically focus on companies capable of above-average growth (often measured in earnings or cash flow), otherwise known as 'growth' companies. This style has recently been out of favour though, so generally these funds haven’t performed quite as well. Both currently invest in some big tech companies such as Taiwan Semiconductor Manufacturing Company and Samsung Electronics.

Janus Henderson Asian Dividend Income is 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. In emerging markets, BMO Emerging Markets Equity has been weak, which our analysis puts down to investments in the consumer staples sector and weak stock selection. While this fund launched 25 years ago it’s still very small in size.

Since the end of 2020, there’s been a change in the market and some value and income-focused funds performed better. It’s a reminder that different investment styles will come in and out of favour, and diversification in any portfolio is important.

Annual percentage growth
April 16 -
April 17
April 17 -
April 18
April 18 -
April 19
April 19 -
April 20
April 20 -
April 21
Baillie Gifford Pacific 36.7% 23.0% 1.6% 7.5% 72.5%
BMO Emerging Markets Equity 27.6% 6.2% 3.4% -14.6% 23.5%
FP Carmignac Emerging Markets N/A N/A N/A N/A 75.1%
Janus Henderson Asian Dividend Income 29.0% 10.8% 4.6% -7.8% 14.0%
IA Asia Pacific ex Japan 34.7% 11.9% 3.2% -5.0% 37.4%
IA Global Emerging Markets 35.1% 12.2% 0.8% -9.6% 38.4%

Past performance is not a guide to the future. Source: *Lipper IM, to 30/04/2021. N/A has been used for funds without a full five years performance history.

More on Baillie Gifford Pacific including charges

Baillie Gifford Pacific key investor information

More on BMO Emerging Markets Equity including charges

BMO Emerging Markets Equity key investor information

More on FP Carmignac Emerging Markets including charges

FP Carmignac Emerging Markets key investor information

More on Janus Henderson Asian Dividend Income including charges

Janus Henderson Asian Dividend Income key investor information

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    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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