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Asian & Emerging Markets funds quarterly review – a lesson in diversification

We look at how Asian and emerging economies have fared, and how funds in this sector have delivered through a tough year for markets across the globe.

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.

2020 will be an unforgettable year, for reasons that originated from the emerging world.

It’s almost been a year since the World Health Organisation's China office first heard of a new virus in China. 2020 then unfolded like no other, as coronavirus spread across the globe, wreaking havoc in its path

The lives of more than 1.3m people have tragically been lost as a result of the virus, and the economic cost has also been high. Globally, unemployment has soared, businesses closed, and inequality risen. The lasting impact on our wellbeing, financial and otherwise, is significant.

How have Asian and emerging economies fared?

This year, the Chinese economy is expected to grow at its weakest pace in over forty years.

The economic damage caused by coronavirus isn’t unique to China, but what’s different is that China has suffered less than most. The UK, Europe, the US and Latin America have struggled to contain the virus, restricting economic recovery. But China is expected to grow around 2% this year, making it the only major economy to expand in 2020 .

It’s not only China that’s experienced lower virus cases relative to the West. Other parts of Asia, like Taiwan, Singapore, Hong Kong and South Korea, have also had a relatively low impact.

Why’s there been such a difference?

Firstly, Asia already has experience dealing with viral outbreaks, most recently with SARS in 2003. Not only has this taught valuable lessons in handling such a crisis, it’s also shaped social behaviours.

Mask wearing and social distancing is new for us here in the UK, but lots of Asian countries are used to it. Mobile tracking devices have also been used more widely, and different attitudes towards data privacy has helped contain outbreaks and manage the impact on the economy.

Another factor helping Asia’s recovery is the high level of respect for government. Countries like China might lack the tradition of democracy, but there’s a higher level of compliance to rules and guidance.

Other emerging regions haven’t fared so well. Countries like Brazil, Russia, Mexico, India and South Africa are all showing increased fatalities. In particular, Latin America continues to report the greatest number of daily deaths as a share of population. Adjusting for population size, the hardest hit countries are Peru and Ecuador.

It’s possible the economic impact will linger for longer in these countries. Brazil, Latin America’s largest economy, had entered recession by September 2020, and economic growth is expected to fall by 5-6% in 2020. With some of these countries already in an economically fragile state, 2021 looks to be a particularly uncertain year.

How have markets performed?

There’ve been huge differences in the way Asian and emerging stock markets have performed this year. While all major markets fell at the height of the crisis, some emerging markets fell more sharply than others. The extent of any recovery varies too.

Looking more broadly, the FTSE Emerging Index has grown 7.9%* so far this year. The FTSE Asia Pacific ex Japan Index has risen by 14.5%*. As always, past performance isn’t a guide to future returns.

There’s plenty of variation in these broader markets. The strength or weakness of individual stock markets has been partly driven by the way their respective countries have handled the virus.

China and Taiwan are two of Asia’s strongest-performing markets, both growing 26.8%* – acting as the main driving force behind the performance of Asian markets this year. Both markets took swift action to stem the virus’s spread meaning they were able to recover quicker.

Some of the large tech companies that make up a big part of these markets have also been strong. Digitisation and increased dependence on technology has accelerated in Asia in recent years, and more prominently in 2020.

Social distancing and stay-at-home initiatives have driven companies to build their online presence, with demand for online entertainment, gaming, grocery deliveries and other retail shopping increasing.

This has boosted share prices, with some of China’s largest ecommerce platforms, including Alibaba and Tencent, performing well. Taiwan’s TSMC, one of the world’s largest semiconductor companies, has also done well.

That said, there was recent volatility in the tech sector, after Beijing proposed sweeping new antitrust rules for China’s technology industry. On the whole these well-established businesses are expected to cope with any increased regulation, but the fact they’ll need to adapt shouldn’t be overlooked.

At the other end of the spectrum lies the Latin American markets, falling 24.2%* so far this year. Brazil has been noticeably weak with a loss of 29.3%*. Emerging European markets have performed poorly too. Russia, which makes up a large part of the eastern European market, has fallen 21.8%*.

Looking at sectors, oil & gas has been one of the weakest, damaged by an oil price slump earlier in the year. This has been painful for Russia as an exporter of natural resources. Other areas like financials also haven't done so well. Banks globally have suffered this year for many reasons, not least declining interest rates and the likelihood of dealing with loan losses following this crisis.

Asian and emerging markets - performance year to date

Past performance isn't a guide to the future. Source: *Lipper IM to 30/11/2020.

What can investors expect in 2021?

Stock markets are likely to remain sensitive to daily news about the virus. Investors will likely want to see that different economies are approaching a peak in virus cases. Or that we continue to see backing from major governments and central banks to support domestic demand and economic activity.

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, supported by hard working populations keen to catch up with consumers in the west could help towards the next stage of growth. This could benefit companies across a number of sectors, including technology, retail and financial services.

What the Research team have been doing

We spoke with a number of Asian and emerging markets fund managers over the past quarter, including Leon Eidelman, manager of the JPMorgan Emerging Markets Fund.

Eidelman recognises the increasing importance Asian markets such as China could have on the global economy and investor returns. He expects Asia to offer plenty of growth opportunity over the coming years. The fund is currently biased towards economies such as China and India, with the manager increasing exposure here in recent years.

That said, he also thinks there are still some great businesses in other emerging markets, including Brazil and Mexico. In his view it's about finding the best opportunities in any Asian or emerging market, regardless of the broader economic backdrop.

We also spoke with fund manager Jason Pidcock, who uses a different approach for his Jupiter Asian Income Fund. He mainly focuses on larger businesses in developed Asian markets, such as Hong Kong, Singapore and Australia. As these markets are more advanced, both economically and politically, he thinks they could offer a more stable backdrop giving businesses the potential to thrive.

Pidcock also focuses on dividend-paying companies, which is different to most Asian and emerging markets funds that focus on growth.

Like lots of fund managers, Pidcock made several changes to his fund this year as the coronavirus pandemic changed the outlook for many companies (both good and bad). It’s also created market volatility, which has let managers invest in companies at lower share prices.

Pidcock added to companies in the consumer space, including ITC, an Indian company involved in consumer areas like food and personal care. Other new investments include a number of food and beverage businesses.

The fund’s also reduced its investments in Australia as the manager has found better opportunities elsewhere. In particular Pidcock’s cut back on investments in property and banks.

More on JPMorgan Emerging Markets, including charges

JPMorgan Emerging Markets key investor information

More on Jupiter Asian Income, including charges

Jupiter Asian Income key investor information

How have Asian and emerging markets funds performed?

So far this year, the average fund in the IA Global Emerging Markets sector has made 8.1%*. The average fund in the IA Asia Pacific ex Japan sector has grown 14.5%*. This means the average fund in these sectors hasn't performed quite as well as the broader emerging and Asian stock markets. As always, past performance isn't a guide to future returns.

By and large, we’ve found funds with a focus on ‘growth’ companies did best – especially those concentrated on some of the region's largest tech companies. 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’ve fallen during hard times, but are often going through a turnaround that’s yet to be reflected in their share price.

More recently in November, amid news of potential vaccines, there’s been a market rotation, with many value and income-focused funds performing better. It’s a reminder that different investment styles will come in and out of favour, and diversification in any portfolio is important.

What about Wealth Shortlist funds?

Asian and emerging markets Wealth Shortlist funds have delivered mixed performance so far this year.

We usually expect this – as it's in line with how we select funds for the Shortlist. If all funds in a given sector are performing well at the same time, they're probably investing in similar areas.

Not all areas perform well all the time, so it can be painful when they're out of favour. We prefer to take a diversified approach by investing with managers who have a variety of strengths, styles and areas of focus.

Remember that past performance is not a guide the future, and performance shown in this article is over a short time period.

Schroder Asian Alpha Plus has been the best-performing Wealth Shortlist fund in this sector so far this year – with investments in some high-growth tech names helping returns. Our analysis shows good stock-picking has also contributed, meaning companies more broadly have performed well, regardless of what sector or country they’re in.

FSSA Greater China Growth has also had a good year. That’s not all surprising given the Chinese stock market has had such a strong year. That said, the fund didn’t do as well as the average fund in the IA China / Greater China sector, due to lower weightings to large tech firms. The manager has an excellent long-term track record though although this isn’t guaranteed to continue.

At the bottom of the table of Wealth Shortlist funds in this sector is ASI Latin American Equity. In keeping with the above, it’s been a tough year for Latin American markets, which has hurt the performance of funds investing there. The fund has done better than the wider Latin American stock market though, and over the longer-term too.

Jupiter India has been weaker this year. Partly as the Indian stock market hasn’t been as strong as others, particularly higher-risk small and medium-sized companies where this fund is focused. The fund also has a slight value tilt, though this has helped performance more recently. We think the fund offers diversification from other Indian and emerging markets funds.

We think emerging markets could be an interesting place for investors prepared to accept the higher risks that come with investing in emerging markets. As always, we suggest a long-term view of at least 5 years.

Annual % growth 30/11/2015 to 30/11/2016 30/11/2016 to 30/11/2017 30/11/2017 to 30/11/2018 30/11/2018 to 30/11/2019 30/11/2019 to 30/11/20
Schroder Asian Alpha Plus 27.4% 32.1% -4.2% 8.7% 28.4%
ASI Asia Pacific Equity 26.7% 19.9% -1.4% 9.6% 20.7%
FSSA Asia Focus 27.3% 22.4% 2.8% 12.2% 14.5%
Jupiter Asian Income N/A 13.1% -1.1% 14.4% 4.9%
IA Asia Pacific ex Japan 29.0% 21.2% -4.3% 10.0% 17.4%
JPM Emerging Markets 30.7% 28.3% -5.3% 19.5% 26.2%
Schroder Small Cap Discovery 21.4% 13.4% -11.2% 4.7% 12.9%
IA Global Emerging Markets 29.2% 22.7% -5.8% 9.1% 12.9%
FSSA Greater China Growth 29.7% 23.8% -1.0% 15.7% 27.7%
IA China/Greater China 26.3% 29.0% -7.9% 12.3% 31.6%
Stewart Investors Indian Subcontinent Sustainability 24.5% 15.1% 6.7% -0.2% 11.1%
Jupiter India 25.7% 16.9% -19.6% -0.5% -11.2%
ASI Latin American Equity 50.9% 20.0% -2.8% 9.4% -16.0%

Past performance is not a guide to the future Source: *Lipper IM to 30/11/2020.

N/A – Full year performance is 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 Asia Pacific Equity key investor information

More on FSSA Greater China Growth, including charges

FSSA Greater China Growth 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

What did you think of this article?

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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