Which Funds are Up with the Emerging Market Rally?

After a difficult 2015, emerging markets dependent on commodities such as Brazil and South Africa are gaining. Which funds are best placed to take advantage of this rally?

Emma Wall 17 May, 2016 | 1:39PM
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Last week, Morningstar ran our annual investment conference, on subjects ranging from Brexit and risk management to the cost of funds and the future of advice. Read on for our coverage of the Morningstar Investment Conference UK in our special report: What the Experts Say.

 

 

Emma Wall: Hello and welcome to the Morningstar series ‘Ask the Expert’. I am Emma Wall and I'm joined today by Simon Dorricott, Senior Fund Analyst for Morningstar.

Hi, Simon.

Simon Dorricott: Hi.

Wall: So we're looking at emerging markets today, let's just start with 2015, not a great year for emerging markets, thanks to Chinese volatility, oil prices falling. What happened?

Dorricott: Exactly. So emerging markets investors had a pretty torrid 2015, returns were quite weak, so pretty significant negative returns for investors there. Obviously commodity prices were a significant influence there. Certain countries were especially weak. So Brazil and South Africa where both the equity markets and the currencies were hit quite hard.

Again due to commodities, but also some concerns over domestic economic growth and some political issues as well. In terms of sector performance, obviously those commodity-related areas underperformed. We saw better performance in more growth areas, so IT and also healthcare did reasonably well.

Wall: 2016, however has been a completely different story, it's almost turned everything on its head, hasn’t it?

Dorricott: That’s exactly right. So much better for emerging markets as a whole, so investors there have outperformed developed markets and shown a positive return. I think we've seen a general increase in risk appetite. We've also seen the fed in the U.S. signaled that interest rates are going to rise on a very slow basis. So that’s allowed currencies in EM to strengthen. We've also seen some, as I say commodity prices have improved significantly, so iron ore, oil prices moved up a lot indeed.

We also had quite a few valuation discrepancies there, so the differences between certain stocks in terms of valuation had widened quite markedly. And so contributed to change around a much improved returns. And in fact if you look at the countries that have done well, we've actually seen Brazil and South Africa or a couple of the laggards from last year doing much better on the back of both equity market performance and strengthening currencies. In the case of Brazil, I think there is a little bit more optimism in terms of political situation and potential for economic reforms that any change there could bring.

Wall: This movement then from growth stocks doing well to the value stocks doing well, is not unique to emerging markets, we're seeing it actually across the globe. The commodity prices in particular having an impact in the emerging regions, presumably there are fund managers who will do well in one set of circumstances and fund managers who would do well in another. How 2015 versus 2016 fund performance has reflected that?

Dorricott: Well, we have seen some quite marked differences between different managers with slightly different styles. So in emerging markets, you don’t necessarily think of growth and value managers or the distinction isn’t quite as marked as it would be in certain other markets like the U.S., for example. But if you look at the returns from some of the managers that we have rated, it's perfectly clear the growth managers like Vontobel and Fidelity, who were top quartile performers in 2015 have really dropped down the performance charts year-to-date and at – well, in or very close to the bottom quartile this year because of that growth bias and exposure to consumer sectors in India.

Whereas the more value orientated managers such as M&G or Lazard as well, they've really risen to the top of the pile, so top quartile performances from those managers tend to be overweight Brazil, underweight the more expensive areas such consumer, staples and yeah, it’s good to see them having their day in the sun.

Wall: Simon, thank you very much.

Dorricott: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching. 

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Emma Wall  is former Senior International Editor for Morningstar