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Asia & Emerging Markets quarterly funds review – how are they handling the virus?

We look at how Asian and emerging markets have fared against the ongoing pandemic, and how funds investing there have performed recently.

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.

The last year is a stark reminder of how diverse Asian and emerging economies are.

While China and east Asian countries like South Korea and Vietnam took quick and decisive action against Covid-19, other emerging areas were slower to react. It means some economies will likely take longer to overcome the virus and recover.

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

How have Asian and emerging economies handled the virus?

The IMF (International Monetary Fund) recently announced it expects the US and China to recover most strongly after the hit to their economies from the virus. The US implemented large stimulus packages to stave off an economic crash. Although its debts have climbed, the packages could put the US on the front foot once global economies open.

China took a different approach. Instead of the more aggressive monetary stimulus (low interest rates and lots of quantitative easing) we’ve seen from the central banks of developed countries, it focused more on containment measures to stop the spread of the virus. Wuhan, the Chinese city where the pandemic is believed to have started, was the first in the world to go into lockdown. Although it came at a cost at the time, it was very successful in tackling the virus.

These stricter measures could eventually see countries like China recover much quicker. In fact, China’s economy grew by 2.3% last year, making it the only major economy to expand in 2020.

While parts of Asia have held up relatively well, the effect of the pandemic on other emerging countries is much larger. Take Latin America – while daily confirmed deaths aren’t as high as last summer, it’s still one of the worst hit regions. Adjusting for population size, Peru and Ecuador are still the hardest hit countries. Africa also took longer to bring in tougher measures and is now fighting its second wave.

Vaccination roll outs will also play a key part in any recovery. Vaccine shortages, or delayed roll outs, could mean economies are slower to recover in low-income countries. Perhaps it’s no surprise richer countries like the US and UK have made progress with vaccine roll outs, while lots of their poorer peers haven’t administered first doses yet.

But it’s becoming clear these richer countries will need to support others if the world is going to contain the virus effectively. New variants mean damage to global economies won’t disappear until the virus is controlled everywhere.

Advanced economies could continue to take a hit unless they help developing economies speed up vaccination programmes. Otherwise global trade and supply chains will likely stay disrupted.

What’s the impact on stock market performance?

Since our last review three months ago, global stock markets have generally performed well, despite ongoing uncertainty. Over this time the wider Asian and emerging stock markets have outperformed some other major markets like the US and Japan. Although, past performance is not a guide to future returns.

Emerging markets have performed well recently, benefiting from optimism from investors but if sentiment changes, so could the performance. We think there are lots of long-term investment opportunities, but these markets can be volatile, so the risks shouldn’t be overlooked.

Over the past year, the FTSE Emerging Index has grown 14.8%* while the FTSE Asia Pacific ex Japan Index has grown 21.2%. This shows how some non-Asian emerging economies haven’t fared as well in handling the virus. There’s still a clear difference in performance between markets.

Korea and Taiwan were two of the best performing, with returns of 41.8% and 40.3%. China wasn’t far behind with growth of 36.0%. During a time when at-home tech and delivery services have been in demand, large tech businesses have done well. This includes companies like TSMC (Taiwan Semiconductor Manufacturing Company), Korea’s Samsung Electronics, and Chinese internet platforms Alibaba and Tencent.

Areas including health care and consumer goods have also held up well. These sectors usually do well in uncertain times because they produce goods that tend to stay in demand even when the outlook for the economy is uncertain.

At the other end lie the Latin American markets, falling 22.0% over the past year. Brazil has been noticeably weak with a loss of 26.0%. Emerging European markets have performed poorly too. Russia, which makes up a large part of the eastern European market, has fallen 19.3%. The oil & gas sector has been one of the weakest, damaged by an oil price slump earlier in 2020. This was painful for oil exporters like Russia. There are signs commodity prices could recover as economies open, though there are no guarantees.

Tourism-based economies have been hit, with a loss of 7.1% for the share prices of travel & leisure companies over the year. The financial sectors also haven't done so well. Banks across the globe have suffered for several reasons, including declining interest rates and the likelihood of dealing with loan losses following the crisis.

Asian & emerging markets - one year performance

Past performance isn't a guide to the future. Source: *Lipper IM to 31/01/2021.

Across global markets, any withdrawal of the stimulus we’ve seen so far could impact markets. That said, emerging economies have generally taken a broader range of measures, so any withdrawal in these markets might not appear as severe.

What should matter the most to investors is the long-term outlook for the companies they invest in. Asian and emerging markets are still home to some exciting trends that are expected to develop over the coming years – even with events like this along the way.

Rising wealth could help towards the next stage of growth, and these markets are also supported by hard working populations keen to catch up with consumers in the west. This could help companies across a range of sectors, including technology, retail and financial services.

How have Asian and emerging markets funds performed?

Over the past year to the end of January 2021, the average fund in the IA Global Emerging Markets sector made 16.5%*, while the average fund in the IA Asia Pacific ex Japan sector grew 22.4%. This means the average fund in these sectors has performed better than the wider emerging and Asian stock markets. As always, past performance isn't a guide to future returns.

Broadly speaking, we’ve found funds with a focus on companies capable of above-average growth (often measured in earnings or cash flow), otherwise known as 'growth' companies, did best. Especially those focused on some of the region's largest tech companies. This means funds like Baillie Gifford Pacific and FP Carmignac Emerging Markets sit at the top of the Asia and emerging markets tables. They’ve got a growth bias and big investments in internet companies like Sea Limited, JD.com and Samsung Electronics.

On the other hand, 'value' focused funds, or those that have less weighting to China or the tech sector, haven’t performed as well. So-called 'value' investors aim to uncover hidden gems – companies whose share prices don’t necessarily reflect their actual worth or earnings potential. These businesses might have fallen on hard times, but are often undergoing a turnaround that’s not yet reflected in their share price.

Income funds usually have a greater focus on value. So Legal & General Asian Income is at the bottom of the Asian performance table. In emerging markets, MI Somerset Emerging Markets Small Cap has also been weak due to a focus on some out-of-favour parts of the market.

31/01/2016 to 31/01/2017 31/01/2017 to 31/01/2018 31/01/2018 to 31/01/2019 31/01/2019 to 31/01/2020 31/01/2020 to 31/01/2021
Baillie Gifford Pacific 32.3% 40.7% -12.5% 18.1% 73.2%
FP Carmignac Emerging Markets **N/A **N/A **N/A **N/A 69.2%
FTSE Asia Pacific ex Japan Total Return 39.2% 20.6% -6.4% 6.9% 26.9%
FTSE Emerging Total Return 43.3% 22.0% -6.5% 6.1% 20.0%
Legal and General Asian Income Trust 46.1% 11.7% -2.5% 1.6% 0.4%
MI Somerset Emerging Markets Small Cap 43.1% 16.6% -6.7% 5.5% -1.0%

Past performance isn't a guide to the future. Source: *Lipper IM to 31/01/2021. Funds listed in alphabetical order. **N/A = full year performance figures not available.

That said, towards the end of 2020, we saw 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.

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 that past performance isn’t a guide the future, and performance stated here is over a short time period.

FSSA Greater China Growth was the best-performing Asian and emerging markets Wealth Shortlist fund over the past year. That’s not surprising given the Chinese stock market has had such a strong year.

That said, the fund hasn’t done quite as well as the average fund in the IA China / Greater China sector, due to lower weightings in large tech firms. The manager has an excellent long-term track record though and is one of the most experienced in this sector.

Schroder Asian Alpha Plus has also done well. Investments in some high-growth tech names have helped returns. Our analysis shows good stock-picking has also contributed, meaning lots of the manager’s investments have performed well, regardless of what sector or country they’re in.

ASI Latin American Equity is at the bottom of the table. It’s been a tough year for Latin American markets, impacting the performance of funds investing there. The fund has outperformed the broader Latin American stock market though, and over the longer term too.

Jupiter India also had a weaker year, partly due to its slight value tilt and some weaker stock selection. 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.

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.

31/01/2016 to 31/01/2017 31/01/2017 to 31/01/2018 31/01/2018 to 31/01/2019 31/01/2019 to 31/01/2020 31/01/2020 to 31/01/2021
ASI Asia Pacific Equity 41.9% 17.4% -4.7% 9.3% 31.7%
ASI Latin American Equity 83.8% 17.5% -0.7% 3.4% -17.8%
FSSA Asia Focus 34.7% 22.4% -1.2% 11.2% 23.2%
FSSA Greater China Growth 39.7% 28.0% -6.3% 14.3% 42.1%
IA Asia Pacific ex Japan 39.0% 20.2% -6.2% 7.9% 27.0%
IA China/Greater China 39.0% 36.2% -13.0% 10.9% 45.5%
IA Global Emerging Markets 44.3% 22.3% -8.2% 7.2% 20.9%
JPM Emerging Markets 45.7% 29.0% -8.4% 17.0% 36.7%
Jupiter Asian Income N/A*% 10.9% 0.5% 10.8% 13.6%
Jupiter India 34.9% 10.2% -22.5% 2.0% -2.5%
Schroder Asian Alpha Plus 40.4% 32.3% -7.5% 7.6% 39.5%
Schroder Small Cap Discovery 26.1% 13.7% -12.5% 5.2% 20.5%
Stewart Investors Indian Subcontinent Sustainability 29.2% 14.3% 0.1% 5.4% 14.5%

Past performance isn't a guide to the future. Source: *Lipper IM to 31/01/2021. Funds listed in alphabetical order. *N/A = full year performance figures not available.

MORE ON ASI ASIA PACIFIC EQUITY, INCLUDING CHARGES

ASI ASIA PACIFIC EQUITY KEY INVESTOR INFORMATION


MORE ON ASI LATIN AMERICAN EQUITY, INCLUDING CHARGES

ASI Latin American EQUITY KEY INVESTOR INFORMATION


MORE ON FSSA ASIA FOCUS, INCLUDING CHARGES

FSSA ASIA FOCUS KEY INVESTOR INFORMATION


MORE ON FSSA GREATER CHINA GROWTH, INCLUDING CHARGES

FSSA GREATER CHINA GROWTH KEY INVESTOR INFORMATION


MORE ON JPM EMERGING MARKETS, INCLUDING CHARGES

JPM EMERGING MARKETS KEY INVESTOR INFORMATION


MORE ON JUPITER ASIAN INCOME, INCLUDING CHARGES

JUPITER ASIAN INCOME KEY INVESTOR INFORMATION


MORE ON JUPITER INDIA, INCLUDING CHARGES

JUPITER INDIA KEY INVESTOR INFORMATION


MORE ON SCHRODER ASIAN ALPHA PLUS, INCLUDING CHARGES

SCHRODER ASIAN ALPHA PLUS KEY INVESTOR INFORMATION


MORE ON SCHRODER SMALL CAP DISCOVERY, INCLUDING CHARGES

SCHRODER SMALL CAP DISCOVERY KEY INVESTOR INFORMATION


MORE ON STEWART INVESTORS INDIA SUBCONTINENT SUSTAINABILITY, INCLUDING CHARGES

STEWART INVESTORS INDIA SUBCONTINENT SUSTAINABILITY KEY INVESTOR INFORMATION


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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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