Page 41 - DIY Investor Magazine - Issue 28

The MSCI Emerging Markets Index is dominated by China (mainland China represented 37.9% of the MSCI Emerging Markets Index at the end of March 2021) and some investors have been using China as a proxy for all emerging markets, but this is overly simplistic. In fact, China has not been a great investment so far in 2021. The Chinese government seems concerned that its economy will overheat and so it has been clamping down on lending once again. It has also been reining in the influence of some of its largest companies, such as Tencent and Alibaba, by targeting them with antitrust investigations. However, there is far more to emerging markets than China. Countries such as Vietnam are seeing soaring growth as manufacturers switch production to this lower cost country from China. Commodity exporters such as Chile and South Africa have benefited as metal prices rise. A strong recovery in the oil price is boosting the Gulf states and Russia. India has been seeing signs of life again, too, although a new wave of COVID cases is knocking confidence somewhat. ‘COMPANIES THAT MANAGERS OF EMERGING MARKETS FUNDS ARE BUYING ARE IN SECTORS SUCH AS TECHNOLOGY, FINANCIALS AND CONSUMER SERVICES’ It is important to remember that emerging markets are not just plays on commodities and manufacturing exports. Most of the companies that managers of emerging markets funds are buying are in sectors such as technology, financials and consumer services. It helps that emerging market stocks are cheaper on average than their developed market counterparts, despite offering the potential for faster earnings growth. For example, the managers of Polar Capital Global Financials have been increasing that fund’s exposure to emerging market banks. They seek to profit from the growth that these companies can achieve as more of the population gains access to a bank account and consumers buy more sophisticated financial products for the first time. Not all emerging markets are benefiting from investors’ attention. For example, Brazil is still hampered by its government’s inept response to the pandemic and the problem has spilled over into Colombia. In Turkey, President Erdogan’s ham-fisted attempts to control inflation and interest rates have backfired. ‘BY 2025, 80% OF THE WORLD’S GROWTH COULD BE COMING FROM EMERGING MARKETS’ Navigating the myriad political and economic maze within the emerging market sector is probably a job best left to the experts. The big management houses have the depth of resource to do the job. There are ten truly global emerging market investment companies, one of which (BlackRock Frontiers) specialises in frontier markets that the index providers do not judge to be liquid enough or offer the same investor protections as emerging markets. The best performing emerging markets investment company over the past year has been Aberdeen Emerging Markets. This is differentiated from its peers by investing through a mixture of open and closed-end funds rather than directly into stocks. Its managers, Andrew Lister and Bernard Moody, aim to make money from picking managers that will outperform, allocating money to the best-performing markets and buying shares in other investment companies on a discount and benefitting as those discounts narrow. One of the Aberdeen fund’s standout winners in recent times has been its stake in Weiss Korea Opportunity. The team also predicted correctly that China would be one of the best places to be invested last year. However, today, Andrew and Bernard think that tensions between China and the US that began under Trump may not be resolved under Biden. The team has been taking some profits on Chinese funds and reinvesting in areas it thinks are cheap, such as Russia. 41 DIY Investor Magazine | Apr 2021