Following the soft-closure of some big-name funds in the emerging market equity space, Morningstar OBSR's Lena Tsymbaluk highlights some alternatives.
Following strong performance towards the end of 2012, emerging markets have lagged developed markets thus far in 2013. Year-to-date to the end of April, the MSCI Emerging Market (MSCI EM) index has fallen 0.9% in US dollar terms, while the MSCI World index for developed country stocks has returned 11.1%.
One negative factor has been the performance of the BRIC country constituents (Brazil, Russia, India and China), all of which have posted weak year-to-date returns. China represents 18% of the MSCI EM index and this has been a drag as the MSCI China index has declined 3.5% for the first four months of 2013.
A disappointing first quarter GDP report, with growth at 7.7% year-on-year, has highlighted concerns that China’s economy may be slowing anew.
Alternatives to emerging market equities
Although the Chinese administration is targeting lower growth going forward, the weaker economic data has principally been due to a significant slowdown in consumption as retail sales growth in the first quarter slowed. This is a concern because the Chinese government wants to rebalance its economy towards consumption, as outlined in the twelfth five-year plan.
Among other BRIC markets, Brazil, which represents 12% of the MSCI EM index, has also been out of favour as investors have been concerned about the government’s efforts to stimulate weakening growth, as well as high inflation.
India was one of the best performing markets in 2012 as investors welcomed a series of proposed reforms designed to revive the economy and tackle the country’s strained finances. However, in 2013, the sense of optimism has begun to fade and Indian shares have posted weak results.
Inflation remains elevated, restricting the scope to reduce interest rates, and there are concerns about the government’s ability to implement reforms. Russia, which has delivered a negative return of 5.3%, has been hurt by downward revisions to global demand expectations that have weighed on commodity prices.
Finally, South Korea, another large component of the MSCI EM index (14%), has fallen 5.7% on concerns about competitiveness versus Japan in the face of a weaker yen.
Comparatively, the ASEAN region has provided a brighter spot within emerging markets. It has continued to outperform thanks to positive structural macro drivers. Domestic consumption remains robust and there is growing evidence of an investment cycle in the Philippines, Thailand and Indonesia. The year-to-date performance of the MSCI Frontier Markets index has also been positive, returning 12.1% in US dollar terms.
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Reporting to Steve Hill
Appointed on 19 September