The bear market of 2022 has been impacted by many factors, including the conflict between Russia and Ukraine, subsequent supply chain concerns across many markets, regulatory concerns in China, the ongoing management of Covid-19, rising inflation and rising interest rates. A common theme which we have observed running through many of the industries affected by these macro events is that high quality, growth stocks have undergone a significant de-rating and that more cyclical, value stocks have done well. This is particularly evident in typically high growth names such as semiconductors and digital economy stocks.
The shift has resurfaced arguments which promote opposite extremes of the style spectrum as the key to long-term outperformance. We do not think the answer lies in such divisive analysis and to focus only on the extremes is restrictive. We believe value investing faces significant risk hurdles in emerging markets and that a combination of quality factors alongside growth can be the best approach to capture the emerging market opportunity.
In this article we explore the long-term performance of different styles in emerging markets and delve more deeply into what makes value companies different in this asset class.
Ultimately, we think the missing ingredient in the style mix is quality. We discuss why it is important and how the combination of more than one style factor may more wholly capitalise on the emerging market opportunity than a single factor alone.
It is restrictive to consider only growth and value; we think a more apt question would be ‘which style best captures the emerging markets opportunity?’
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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.
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