As equities across emerging markets recover, is investing in them now too much of a risk?
- Equities in emerging markets such as China, India and Brazil have recovered
- Most investment experts believe that in the short term, world economic recovery is likely to be led by China and other Asian nations
Thrill-seekers must be delighted that theme parks have re-opened. But those who like investing and are looking for a rollercoaster ride should eye up opportunities in emerging markets such as China, India and Brazil.
Equities across these have recovered dramatically from the initial coronavirus hit. According to investment house Lazard: ‘The Covid-19 chapter of the 2020 book certainly isn’t finished yet, but the fall and recovery in emerging markets equities has been a very sharp V.’
It says: ‘As we enter the third quarter, we have identified several catalysts that would point to an uptick in global growth, which would in turn indicate the potential for a further rerating.’
Most investment experts believe that in the short term, world economic recovery is likely to be led by China and other Asian nations, but a potential spoiler is what happens with Covid-19
But with the spread of coronavirus continuing in many developing economies and strained tensions between China and the UK, China and the US and now the UK and Russia, is investing in emerging markets too much of a risky proposition?
Most investment experts believe that in the short term, world economic recovery is likely to be led by China and other Asian nations.
Jason Hollands, a director of wealth manager Tilney, says: ‘Asia was the first region to experience the pandemic and the first to come out of lockdown.
‘While developed market economies are predicted to contract by around 5.6 per cent this year, the equivalent contraction in emerging economies is expected to be around 1.6 per cent, followed by 6.5 per cent growth next year. Furthermore, a key positive from an investment point of view is that equity prices in emerging markets look reasonable compared to developed markets.’
So, shares that comprise the MSCI Emerging Markets Index – the benchmark for emerging markets – currently trade at around 14 times the forecast earnings for the year ahead.
By way of comparison, this compares to 19 times for global equities overall and nearly 22 times for the tech-heavy US S&P 500 Index. In other words, emerging market shares are trading at a discount to shares on developed markets.
A potential spoiler is what happens with Covid-19 further down the line – especially the possible impact of a second wave. Infection rates in emerging economies remain a big concern and are running particularly high in Latin America, most notably Brazil.
Infection rates in emerging economies remain a big concern and are running particularly high in Latin America, most notably Brazil (pictured)
Ayesha Akbar is a multi-asset portfolio manager at Fidelity International. She says: ‘While the coronavirus response has varied across emerging market economies, with some countries and regions handling it well (Vietnam, South East Asia), and others struggling (Brazil, India), lockdowns have now eased and economic activity has resumed. As long as recovery doesn’t stall, I expect emerging market assets to continue to do well.’
Emma Wall, head of investment analysis at Hargreaves Lansdown, says: ‘Looking at historical valuations, emerging markets look good value right now and there are plenty of benefits that they can offer a portfolio. With economic growth comes investment opportunities, and the chance for UK investors to add diversification to home-grown investments.
‘There are world leaders to be found in emerging markets across all sectors; technology, consumer staples, pharmaceuticals and auto-manufacturers. Often, they are on cheaper valuations than their developed market peers.’
Ben Yearsley, a director of Shore Financial Planning, is a buyer of emerging markets. ‘Yes, they are riskier,’ he says, ‘but generally such markets are cheaper than developed markets and they offer better growth potential.’
Yearsley recently topped up his personal holdings in emerging market funds with the purchase of shares in investment trust JPM Emerging Markets. He likes the idea of pairing a stake in a general emerging markets fund with a holding in a specialist fund such as Matthews China Small Companies which aims to find the next Tencent or Alibaba-style success story.
Teodor Dilov, at wealth manager Interactive Investor, also rates JPM Emerging Markets as well as M&G Emerging Markets Bond fund managed by Claudia Calich.
Why India could provide long-term profits
While India, like almost all nations, has been badly affected by coronavirus, some investment experts believe the country’s stock market provides investors with the prospect of good long-term returns.
It should prosper, they say, as India looks to overtake China in the next 20 years as the world’s largest economy with consumer spending expected to quadruple to $6trillion (£4.9trillion) by 2030.
Some investment experts believe the India’s stock market provides investors with the prospect of good long-term returns (Pictured: Homeless people wait in a queue to collect free food in Kolkata)
Jason Hollands, a director of wealth manager Tilney, is a big fan of India. He says: ‘I am especially positive of the long-term potential for India which has a very attractive demographic profile. Over half the Indian population is under 25 and the average age is 29, compared to 40 in the UK and over 48 in Japan.
‘The country is also benefiting from a rapid expansion in the middle-classes and has enjoyed a relatively prolonged period of political stability and meaningful economic reform.’
The election of Prime Minister Narendra Modi in 2014 did much to revitalise the Indian economy. He instigated sweeping business reforms which fostered a new entrepreneurial spirit, leading to the creation of new businesses and a determination for the country to become the centre of the global supply chain.
‘We are rolling out the red carpet for all global companies to come and establish their presence in India,’ said Modi earlier this month. ‘Very few countries will offer the kind of opportunity that India does.’
As manufacturers look to reduce their reliance on economies such as China, especially with the rise in geo-political tensions, India is emerging as a viable alternative.
Apple is one of several global brands to establish a large manufacturing base in India, recently shifting a fifth of its Chinese-based production there. Industries such as IT, telecoms and technology are rapidly growing.
The significant Covid-led increase in people working from home and the widespread business use of technologies such as video conferencing and cloud storage will boost these sectors further.
Investment fund scrutineer FundCalibre has identified three Indian funds that it believes are well suited to take advantage of any rise in Indian share prices. They are Goldman Sachs India Equity Portfolio, IIFL India Equity Opportunities and Stewart Investors Indian Subcontinent Sustainability.