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Asia & emerging markets review – where are the opportunities?

We look at how Asian and emerging markets fared in 2021, how funds investing in the region have performed, and consider the longer-term opportunity.

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.

2021 wasn’t a golden year for Asian and emerging markets. Many developed countries came out of lockdowns and saw their economies bounce back. However emerging markets were held back by ongoing Covid-19 restrictions, the risks of high inflation and stagnating growth, and a comedown for China after a more successful 2020.

Lots of emerging markets have had to take a different approach to control or boost their economies compared with developed ones. Often the east follows west in terms of economic policy. But with inflation spiralling, countries including Brazil, Russia and Chile have reacted quickly, already raising and reaching lofty interest rates.

While high and rising interest rates risk putting the brakes on economic growth, the consequences of out-of-control inflation could be even more damaging. This is especially true for regions like Latin America that have experienced high or hyperinflation in the past.

China, however, is further apart from other major central banks. It recently cut a key interest rate for the first time in almost two years due to slowing economic growth.

While China’s economy grew 8.1% last year, this was coming off a low base after the effects of the pandemic in 2020. Growth in the last three months of 2021 was better than expected but slower than the previous three months, while retail sales growth fell in December. China’s zero-Covid policy also means some cities have gone back into lockdown because of the Omicron variant, so we’re yet to see the full impact of this on the economy.

Sentiment towards China last year was also damaged by regulatory crackdowns, a weakening property sector, a fractious relationship with the US, and power shortages.

While the size of China’s market means it offers lots of opportunity, it faces challenges too. China’s ‘common prosperity’ agenda is one thing that could bring more, hopefully positive, change. It aims to reduce inequality and narrow the gap between the rich and poor. Several policy initiatives have already been implemented, but there will likely be far more to come.

Don’t overlook some disruption in the short term though – we saw this last year when the authorities put the brakes on private education companies. In this case it could help bridge the gap between those families able and unable to afford extra tuition. But it also means education companies are no longer allowed to make profits.

The long-term opportunity

Over the longer term, the Asian and emerging markets’ increasingly affluent middle class could provide a boost. With money to spend, this creates opportunities for both companies and investors. This includes an increasing take up of everyday consumer staples, as well as healthcare products and financial services.

Remember though, the less developed nature of these markets presents greater risks for investors. Investing in Asian and emerging markets can be volatile compared with developed ones. That’s why a long-term outlook of at least five to ten years is essential.

The virus still creates uncertainty across the globe, and the zero-Covid policy used by some Asia Pacific countries could be difficult to maintain, especially with the latest Omicron variant. The virus could also be worse for nations that still have largely unvaccinated populations.

The continuation of the virus could favour some businesses, like those in the digital space, over those that rely on social contact. On the flipside, areas related to travel, hospitality and leisure could benefit from any recovery.

How have stock markets performed?

Against the challenges we’ve seen, it’s been a tougher year for Asian and emerging stock markets. Over the past year, the broader emerging stock market has fallen 1.20%*, while the Asian market lost 5.75%. This compares with the global stock market which made an impressive gain of 18.56%, benefiting from ongoing strength in the US and a bounce back in the UK. As always, past performance isn’t a guide to future performance.

Much of the weaker performance in the emerging world comes from China, which fell 26.64% over the year. That was partly because large tech companies with high growth expectations fell out of favour, while other sectors, like property, were hurt by regulatory crackdowns from China’s authorities.

The South Korean market also hasn’t done as well recently, following a period of strong performance. Rising interest rates, slowing global growth, and a government clampdown on household borrowing have conspired to put the brakes on share prices. Falling memory-chip prices also haven’t helped, while Samsung Electronics, a supplier of memory chips and a large constituent of the South Korean market, has seen its share price fall in recent months.

Elsewhere, despite struggling with the pandemic and slowing economic growth, Vietnam was one of the strongest-performing markets over the past year – demonstrating that stock market returns aren’t always tied to the success of the economy. The Vietnamese market grew 32.67% over the year, against a backdrop of rising investment from domestic investors.

India wasn’t far behind, growing 32.52%, 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 company listings was a boom for the market.

If anything, 2021 was 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 remain volatile.

Emerging stock markets - one year performance

Past performance isn't a guide to the future. Source: *Lipper IM, to 31/01/2022.

Name % Growth % Growth % Growth % Growth % Growth
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 31/01/2021 To 31/01/2022
FTSE Asia Pacific ex Japan 20.61 -6.37 6.90 26.89 -5.75
FTSE China 37.60 -13.36 5.64 42.06 -26.64
FTSE Emerging 22.00 -6.53 6.07 19.95 -1.20
FTSE India 22.74 -6.66 8.12 11.12 32.52
FTSE Korea 26.45 -8.71 -3.72 50.50 -15.34
FTSE Vietnam 46.46 -12.42 -0.70 16.65 32.67
FTSE World TR GBP 12.72 0.88 17.14 11.78 18.56

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 in this sector over the year to the end of January 2022. It benefited from the strength of the broader Indian market. Along with 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

JPMorgan Emerging Markets was the weakest performer in this sector. A focus on quality companies with sustainable or higher-growth earnings prospects, including Chinese tech companies, boosted performance in 2020. However this style broadly fell out of favour with investors last year.

Businesses that are expected to do better during an economic recovery have performed better since the vaccine announcements in November 2020. This includes materials, industrials, and commodities-related companies. The fund’s managers don’t invest as much in this type of company, so the fund missed out on some of the gains made.

The managers continue to focus on companies they expect will grow more sustainably over the long run. That includes ones that could benefit from innovation and growth in how much people consume.

Find out more about JPMorgan Emerging Markets, including charges

JPMorgan Emerging Markets Key Investor Information

Name % Growth % Growth % Growth % Growth % Growth
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 31/01/2021 To 31/01/2022
Jupiter India 11.43 -21.65 3.08 -1.41 38.09
FTSE India 22.74 -6.66 8.12 11.12 32.52
JPM Emerging Markets 29.03 -8.36 16.95 36.74 -18.55
FTSE Emerging 22.00 -6.53 6.07 19.95 -1.20

Past performance isn't a guide to the future. Source: Lipper IM, to 31/01/2022.

What have the Research team been up to?

We removed the ASI Latin American Equity Fund from the Wealth Shortlist in February 2022. We still have conviction in the team managing the fund. However, we don’t believe this specialist fund is currently suitable for the Wealth Shortlist.

The Wealth Shortlist aims to provide the building blocks to build a well-rounded long-term investment portfolio, to which more funds can be added depending on an investor’s goals and tolerance for risk. Following research and discussion, we don’t currently view specialist funds focused on Latin America as building blocks.

For most investors who are happy with the risks that come with investing in emerging markets, we think a broad global emerging markets fund could be a good starting point. Most offer some exposure to the Latin American region. But they’re run by fund managers who have the flexibility to increase or decrease how much is invested in the region. They’ll do this when they feel it’s right and depending on where they find the best opportunities.

We still think the ASI Latin American Equity Fund is one of the best funds investing specifically in this region. The fund is managed by an experienced emerging markets team, with investment capabilities that have been built over several decades. The fund could benefit from any ongoing recovery in the region this year, though there are no guarantees.

Find out more about ASI Latin American Equity Fund, including charges

ASI Latin American Equity Fund Key Investor Information

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    Our fund research is for investors who understand the risks of investing and that 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.

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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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