Why Investors Don’t Like Emerging Markets

Your “buy British” mentality might not be a top-yielding strategy

Sunniva Kolostyak 26 July, 2021 | 12:28PM
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Have you ever asked yourself why you’re not investing in emerging markets? Is it because you want your money to remain local, or is it because you’re apprehensive about investing in something that feels far away and unknown?

This is something Templeton Emerging Markets Investment Team has investigated. Its research found that only 11% of UK consumers are invested in emerging markets, despite products and services from these countries are fundamental to all aspects of our daily lives.

In fact, 93% of adults use an emerging markets product daily: 27.3 million people watch a Samsung TV and one in four has a Beko product. And yet when asked, 52% state that they are hesitant to invest in emerging markets, with 41% being outright negative to the idea. 

The survey also found negative preconceptions on labour practices and treatment of workers, corruption, and concerns about regulatory practices. Indeed, some 49% cited environmental, social and governance (ESG) issues as a concern for the region. But people had no clear reasoning for why they have these biases – and according to Templeton, most of the negative perceptions are unfounded.

For example, China’s clean energy sector is set for growth due to the country’s decarbonisation strategy; the country is a world leader in clean energy production, produces more than 70% of all solar panels, half of the world’s electric vehicles, and a third of its wind power.

It is worth noting, however, that 38% of those surveyed are positive and excited about the prospects of investing in emerging markets, particularly younger generations like Gen Z and Millennials. But not even this group is taking advantage of investing in growing economies.

Emerging Market Trends

According to Jason Hollands, managing director of Bestinvest, it makes sense for most investors to be exposed to the region: most of the world's economic activity is taking place in emerging markets and together they represent half of global GDP as well as housing most of the world’s population.

On top of this, the rise of the middle-class consumer across these regions is set to be a key driver for growth over in the long term. An extra 1.5 billion people will be considered middle-class by the end of the decade, of whom the vast majority will be in Asia and emerging markets. In India, the average age is 28.7 years (compared to 40.6 years in the UK) and the country’s consumption is forecasted to quadruple from around $1.5 trillion to $6 trillion by 2030, making it the third largest consumer market after the US and China.

“In terms of global market-cap though, emerging markets punch below their weight because they are less developed from a financial markets perspective,” Hollands explains. Emerging markets only make up about 13% of the world index, which is roughly what a pure equity portfolio should aim to hold, he says.

Ben Yearsley, investment director at Shore Financial Planning, says a simple way to look at the different markets is to divide your portfolio into shorter and longer-term horizons. When investing for the shorter-term, he suggests sticking to the UK market – it is cheaper, under-covered and -owned, and the country’s vaccination programme has been best-in-class. But for longer-term investors, he argues, the best opportunities are in Asia and emerging markets: “Valuations are decent, economies are on a sound footing and Covid has been dealt with well, especially in Asian emerging countries. Finally, a commodity boom seems on the way combined with a weakish dollar, which is normally a good sign for investors.”

How to Invest in EMs

If you’re looking to invest in emerging markets, the most “appropriate” route is through funds or trusts covering global emerging market or Asia ex Japan, Hollands says. These categories mitigate risk by diversifying across regions and stocks – and the two categories have a considerable overlap due to Asia’s presence in emerging markets.

He recommends the Aubrey Global Emerging Market Opportunities fund, which focuses on the growth in consumption and services in the areal Fidelity Institutional Emerging Markets, which blends ideas from regional teams; and the Gold-Rated JPMorgan Emerging Market Investment Trust, which is underweight in China with a bias towards India and sector themes like technology and financial services. 

Yearsley recommends FSSA Global Emerging Markets Focus Fund, which is heavy on financial services and consumer stocks; Bronze-Rated JPMorgan Emerging Market Income Investment Trust, where 60% of the portfolio has the potential to deliver yields of 3-6%; Alquity India, which is heavy on financials and tech; and Matthews Asia Funds – China Small Companies, which has a high exposure to volatility and momentum.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Sunniva Kolostyak  is data journalist for Morningstar.co.uk