2020: The time is right for investing in Emerging Market equities
25 February 2020
There are a number of shorter-term factors that we feel could increase the attraction of emerging markets this year
Significant positive change
Emerging markets have experienced significant positive change over the past decade. Economic growth, urbanisation, the rise of middle-class consumers and the mass adoption of technology have all combined to alter the investment landscape.
These trends have given rise to some truly world-class companies that are benefiting, not only from the higher economic growth found within emerging markets but in many cases are leading the way in a global marketplace.
This exciting new breed of companies exists in many areas including: Taiwanese technology, South Korean cosmetics, Russian fintech and Chinese internet-related businesses. Whilst these companies represent a new face of emerging markets, there are also many longer established companies operating in domestic markets who are benefitting from strong consumption trends and structural reforms.
Why invest now
Emerging markets have long represented an attractive investment opportunity and this has not gone unnoticed. The trends outlined above have been developing over many years and we believe that investors will increasingly be attracted to the new breed of sustainable growth opportunities in emerging markets.
There are however, a number of shorter-term factors that we feel could increase the attraction of emerging markets this year.
The price to book valuation of the MSCI Emerging Markets Index is trading at close to its 15-year low relative to the MSCI World Index.
Past performance is not a guide to future returns
Source: Bloomberg and MSCI as at 31 December 2019. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed or produced by MSCI.
Almost all emerging market central banks lowered interest rates in 2019 and this trend has continued in 2020. We expect this will promote higher economic activity in 2020 and beyond.
We believe many emerging market economies will see an uptick in growth in 2020. In some cases, such as Russia, South Africa and Turkey this represents a rebound after years of subdued growth.
We expect an earnings acceleration across emerging markets in 2020. The associated growth rate is also expected to be higher than for developed markets and this may be a key catalyst in closing the valuation gap between the two asset classes.
Emerging market investors have faced a multitude of headwinds in recent years in the form of trade wars, recession fears, a crowded electoral calendar, dollar strength and reminbi weakness. Whatever the future holds, these particular challenges appear to have settled for now.
Accessing emerging markets in the right way can make a significant difference to any investment strategy. We firmly believe our high conviction, stock driven approach is the best way to benefit from the positive developments taking place in emerging markets.
Past performance is not a guide to
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Risk warnings – Investors should
also be aware of the following risk
factors which may be applicable to the
strategy shown in this document.
- Investing in foreign markets
introduces a risk where adverse
movements in currency exchange
rates could result in a decrease in the
value of your investment.
- This strategy may hold a limited
number of investments. If one of
these investments falls in value this
can have a greater impact on the
strategy’s value than if it held a larger
number of investments.
- Smaller companies may be riskier and
their shares may be less liquid than
larger companies, meaning that their
share price may be more volatile.
- Emerging markets or less developed
countries may face more political,
economic or structural challenges
than developed countries.
Accordingly, investment in emerging
markets is generally characterised by
higher levels of risk than investment
in fully developed markets.
- The strategy may invest in
derivatives LEPWs (Low Exercise
Price Warrants), Index futures and
FX forwards to obtain, increase or
reduce exposure to underlying assets.
The use of derivatives may result in
greater fluctuations of returns due to
the value of the derivative not moving
in line with the underlying asset.
Certain types of derivatives can be
difficult to purchase or sell in certain