Emerging market investors have endured a rocky ride over the last 12 months. For those true believers in the merits of an expanding emerging markets allocation, the unpleasant view of retreating stock market returns across the BRIC exchanges proved disappointing.
Steven Sweeney, Senior Investment Analyst, commented, “The past year has tested the resolve of the most ardent emerging market aficionados.”
“Deteriorating investment returns have prompted a bout of head scratching for many EM investors due to the nonsensical reality of US and European equities outperforming emerging markets while the economic fundamentals across both categories were in such divergence.”
The dominant cause of weak performance through 2011 and 2012 was the relentless pulverisation of investor risk appetite.
“Emerging market equity returns have historically been hostage to investor sentiment, and so it proved once again,” said Sweeney.
“With the escalating European sovereign debt crisis – now in its third year – preoccupying global markets, investors were prompted to bunker down and retrieve capital from higher risk assets. While there were periodic bouts of ‘risk on’ often following news of another hefty cache of tax payer funds thrown at governments and failing banks, these proved short-lived.”
The call for increasing EM exposure finds voice…
Nevertheless, there has been growing support for an increased emerging market exposure, particularly from institutional clients. The ascent of the BRICs and emerging Asia with improved economic muscle, robust balance sheets and attractive aspirational demographics suggests historians will regard the 21st century as the age of the emerging world.
“Institutional clients are accessing the sector in increasing allocations,” said Sweeney. “It is timely for advisers to revisit the portfolio radar to ensure the trend does not leave retail clients stuck in the starting blocks.”
…while changing dynamics of the Chinese economy have profound implications for Australia
“As China shifts gear from an export led to a domestic consumption driven story, it may be increasingly difficult for Australian investors to gain exposure to the Asian consumption story through holdings in Australian resource stocks,” explained Sweeney.
“There are also signs that the commodity cycle is peaking, dampening demand for Australian resource stocks. This shift may reduce the Australian equity market’s historical performance correlation with emerging markets.”
The review
Lonsec’s Global Equity Sector Review encompassed 24 long only global emerging market and Asian equity investment managed funds.
Of these, five attained Lonsec’s top rating of ‘Highly Recommended’; the Aberdeen Asian Opportunities Fund, the Aberdeen Emerging Opportunities Fund, Fidelity Asia Fund, Premium China Fund and the T Rowe Price Asia ex Japan Equity Fund.
