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Asia & Emerging Markets review – Russia storming ahead while China struggles

We look at how Asian and emerging markets have fared recently, how different regions are coping with inflation, 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.

Lots of Asian and emerging economies were heralded last year for the way they handled the pandemic. Swift and strict lockdowns helped to contain the virus, allowing some countries to lift restrictions sooner than developed nations.

Fast forward to today and things look a little different. While lots of developed countries have adopted a strategy of rolling out Covid-19 vaccinations as quickly as possible, some eastern economies are lagging and have entered new lockdowns.

In China, a zero-Covid policy has come under strain as new cases have started to spread, while other countries have taken a different approach and have opened their borders.

China’s constraints have offered some protection to its population, but there are question marks over how sustainable this strategy is. While the country might have physically closed off its borders from the rest of the world, the virus shows few signs of abating. From an investment standpoint, the restrictions have also contributed to a broader economic slowdown and putting the brakes on consumer spending.

China is also dealing with weakness in its property sector. We took a closer look at this in our recent article on the Evergrande crisis. It could remain under strain against a weaker economic backdrop and a slowdown in spending.

The country has also been dealing with energy shortages, leaving some businesses and households without electricity. Several factors have contributed to the shortages. These have included high coal prices, the closure of coal mines and power plants for environmental and safety reasons, and sanctions on imported Australian coal. Anti-corruption campaigns have also disrupted supplies, while some mines were closed to allow the sky to clear for events like the Communist party’s 100th anniversary.

The government’s trying to tackle this by ordering state-owned companies to raise output and it’s also attempting to increase imports. There’s some concern that a rise in coal-fired power will put the brakes on China’s green targets. This presents a dilemma though given the need to keep households warm this winter.

The inflation conundrum

One thing that doesn’t seem to be in short supply is inflation. Energy shortages, disrupted supply chains and transport issues have all contributed to rising inflation worldwide. So has the reopening of most economies, leading to a bump in consumption.

While inflation looked to be temporary previously, it’s now looking like this case of inflation could be more than just a blip. Inflation matters to investors for a number of reasons, including the likelihood that central banks will raise interest rates to stop it getting out of control. Rising interest rates increases companies’ borrowing costs and decreases the value of future cash flows, putting pressure on share prices.

In the emerging markets, we’ve already seen rate rises in South Korea, Mexico, and Russia. Brazil recently saw its biggest interest rate rise since 2002 in a bid to fight one of the highest rates of inflation among the G20 nations, spurred by high government spending. Its central bank has already raised rates six times this year and it’s expected there’s more to come.

More broadly, Latin America has been one of the world’s worst hit regions from the coronavirus in terms of both health and economic growth. There are some shining lights though. Latin America is becoming a global leader in fintech, with money flowing into the sector and leading to a wave of start-ups.

How have stock markets performed?

Over the past year, the broader Asian and emerging markets have grown 9.36%* and 9.08%, respectively. Much of this growth came towards the end of 2020 though, as these markets have made little headway since the start of 2021, rising just 0.65% and 1.93%. This is also behind the 30.42% made by the global stock market over the past year, which was boosted by the UK, US, and European markets. As always, past performance isn’t a guide to future returns.

Much of the weaker performance in the emerging world comes from China, which fell 15.72% over the year. Regulatory crackdowns in the technology and education sectors, the risk of a property crisis, energy shortages, rising inflation and slowing growth have all played their part in weaker sentiment towards China.

Brazil has also recently been weaker, after performing well in the first half of the year. High government spending, poor handling of the coronavirus crisis, and rising inflation has weighed on its market in recent months.

Elsewhere, Russia has steamed ahead, rising 77.77%, after being one of the weakest emerging markets last year. Russia relies heavily on exports and demand for its natural resources, so rising commodity prices have been a welcome boost for companies in these sectors.

India has also had a strong year, overcoming a severe second wave of the virus at the start of the year. An increasing pace of vaccination, support from its government and the Reserve Bank of India, and a flurry of new tech company listings on its stock market has put India ahead of most other markets.

If anything, this year has been another reminder that different markets perform well, or poorly, from year to year. As we continue to navigate pandemic uncertainties and potential action from global central banks, markets across the globe are likely to keep experiencing ups and downs.

Emerging stock markets' one year performance

Past performance isn't a guide to the future. Source: *Lipper IM, to 31/10/2021.

Annual percentage growth

31/10/2016 to 31/10/2017 31/10/2017 to 31/10/2018 31/10/2018 to 31/10/2019 31/10/2019 to 31/10/2020 31/10/2020 to 31/10/2021
FTSE Asia Pacific ex Japan 16.11% -8.35% 12.58% 12.03% 11.30%
FTSE Brazil 0.69% 8.07% 12.96% -37.69% 6.94%
FTSE China 24.44% -13.32% 11.99% 37.00% -13.77%
FTSE Emerging 11.98% -7.09% 12.59% 7.96% 10.75%
FTSE India 15.32% -10.36% 15.18% -1.73% 44.61%
FTSE Russia 8.70% 15.38% 33.48% -30.09% 80.33%

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. 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 Jupiter India Fund was the best-performing Wealth Shortlist fund over the year to the end of October 2021. It benefited from the strength of the broader Indian market, as well as investments in higher-risk small and medium-sized companies and good stock-picking from manager Avinash Vazirani.

Find out more about Jupiter India, including charges

Jupiter India Key Investor Information

ASI Latin American Equity was a weaker performer, with investments in the financials and industrials sectors detracting from returns. Despite recent performance, the management team has outperformed the Latin American stock market over the longer term.

Find out more about ASI Latin American Equity, including charges

ASI Latin American Equity Key Investor Information

Annual percentage growth

31/10/2016 to 31/10/2017 31/10/2017 to 31/10/2018 31/10/2018 to 31/10/2019 31/10/2019 to 31/10/2020 31/10/2020 to 31/10/2021
Jupiter India 6.06% -26.70% 9.07% -15.92% 51.75%
FTSE India 15.32% -10.36% 15.18% -1.73% 44.61%
ASI Latin American Equity 6.98% -4.85% 13.89% -33.17% 5.50%
FTSE Emerging Latin America TR 0.62% 1.31% 8.88% -33.49% 14.08%

Past performance isn't a guide to the future. Source: *Lipper IM to 31/10/2021.

How have other Asian and emerging markets funds performed?

Over the past year, the average fund in the IA Global Emerging Markets sector made 14.36%*. The average fund in the IA Asia Pacific ex Japan sector grew 11.73%, 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 companies but are higher risk. Janus Henderson Asia Pacific Capital Growth was the weakest performer, held back by investments in big Chinese tech companies and those impacted by regulation crackdowns.

Find out more about Matthews Asia Small Companies, including charges

Matthews Asia Small Companies Key Investor Information

Find out more about Janus Henderson Asia Pacific Capital Growth, including charges

Janus Henderson Asia Pacific Capital Growth Key Investor Information

MI Somerset Emerging Markets Dividend Growth is now the best-performing fund in the emerging markets sector over the last 12 months. Income-focused funds had a better year after falling out of favour last year, and this fund also has a higher weighting to Russia than lots of others in the sector.

Comgest Growth Emerging Markets has performed poorly over the year. Not having as much invested in sectors more impacted by the health of the economy, like energy and materials, which have performed well, hasn’t helped.

Find out more about MI Somerset Emerging Markets Dividend Growth, including charges

MI Somerset Emerging Markets Dividend Growth Key Investor Information

Annual percentage growth

31/10/2016 to 31/10/2017 31/10/2017 to 31/10/2018 31/10/2018 to 31/10/2019 31/10/2019 to 31/10/2020 31/10/2020 to 31/10/2021
Matthews Asia Small Companies 5.33% -7.32% 16.97% 20.82% 42.14%
Janus Henderson Asia Pacific Capital Growth 19.39% -11.60% 17.83% 16.21% -0.79%
IA Asia Pacific ex Japan 16.10% -9.24% 14.46% 10.41% 13.23%
MI Somerset Emerging Markets Dividend Growth 15.79% -15.74% 14.26% -17.16% 33.18%
Comgest Growth Emerging Markets Plus N/A N/A N/A N/A -5.15%
IA Global Emerging Markets 15.06% -10.53% 13.4% 4.85% 15.65%

Past performance isn't a guide to the future. N/A means no data available for this time period. Source: *Lipper IM, to 31/10/2021.

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

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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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