Page 40 - DIY Investor Magazine - Issue 28

THERE IS MORE TO EMERGING MARKETS THAN CHINA James Carthew Head of Investment Trusts Markets are trying to get to grips with the long term effects of COVID-19 on the global economy, but the prognosis is hard to call. That has led to some volatility this year, which may be a feature of markets for a while yet. USimplistically, the markets that did best in 2020 were those where the virus was well-managed. That included countries such as China, South Korea and Taiwan. Indeed, JPMorgan China Growth & Income and Weiss Korea Opportunities were amongst the best-performing of all investment companies. In 2020, investors also favoured growth stories, especially companies in the technology sector. That was good news for specialists such as Polar Capital Technology and Allianz Technology but also for generalist funds with significant technology exposure such as Scottish Mortgage and its stablemate Pacific Horizon (which had a double whammy by also being heavily exposed to those top- performing countries in Asia). In summary then, 2020 was all about avoiding the worst of the pandemic and buying stocks that COVID-19 either did not affect or were actually boosted by lockdowns. Towards the end of the year, however, the story started to change. In November, the good news on vaccines gave hope that we could get back to normal. This triggered a big rotation into ‘value’-style stocks, to the benefit of funds such as Temple Bar in the UK. In 2021, investors are sizing up the potential long-term effects of the vast stimulus that has been injected by governments and central banks. Commentators are talking about the prospect of a global synchronised recovery this year. ‘THE MARKETS THAT DID BEST IN 2020 WERE THOSE WHERE THE VIRUS WAS WELL-MANAGED’ China has just reported some spectacular GDP growth figures for the first three months of 2021 (18.3% year on year growth). The figure is distorted by the contraction of that economy in the first quarter of 2020. Nevertheless, China is re-expanding. At the same time, Joe Biden’s economic bail out holds out the prospect of a boom in the US. Strong economic growth in these two powerhouse economies should more than offset any lingering gloom in Europe. However, the true beneficiaries of this may be emerging and frontier markets. ‘THE TRUE BENEFICIARIES OF THIS MAY BE EMERGING AND FRONTIER MARKETS’ One reason is that, even in the countries that were hard hit by COVID, the effect on their government finances was not as severe as it has been in the developed world. They should benefit from increased global demand without being so exposed to the worries about how this is all going to be paid for. The US dollar has been weakening. Generally, when the dollar goes down, emerging markets go up. The reasons for this aren’t entirely clear – the effect on commodity prices perhaps, or a fall in the cost of servicing dollar debt. One idea is that, freed from worrying about their exchange rates, emerging market governments can go for faster growth. Another, is that a weak dollar is actually caused in part by investors looking elsewhere for riskier but more rewarding investment opportunities. Regardless, the two are related and this relationship has been working again over the last few months. There are all the usual factors working in emerging markets’ favour too, such as younger populations and a growing middle class. There are even tentative signs that the emerging world is embracing the need for tackling climate change. For example, China is targeting net zero emissions by 2060. This creates opportunities for a whole raft of new companies. DIY Investor Magazine | Apr 2021 40