Emerging Markets Returns Not For The Faint Hearted, Says Lonsec

Brave-hearted investors can still expect reasonable returns from emerging markets investment but should adopt a measured long term approach and be prepared for periodic selloffs, according to a new report from research house Lonsec.

Lonsec recently released its annual Global Emerging Markets and Regional Equities Sector Review which showed that for the first time since 2010, emerging markets outperformed Australian equities for the year to June 2015.

However, the report highlighted that emerging markets investors continue to face substantial volatility, as evident in recent months with performance fluctuating across different countries and regions.

According to the report, Asian equities delivered 15% in 2014 and 27% for the year to 30 June 2015, benefiting from another strong year for Indian equities and a rebound in sentiment for Chinese equities.  Indian equities proved the standout performer delivering 35% in 2014 and 27% for the year to 30 June 2015.  However, another half of the so called ‘BRIC’ economies – Brazil and Russia – were out of favour due to the weakness in the commodity cycle, sliding currency and political tension.

Ongoing volatility has continued to spook investors with Lonsec predicting that this year is likely to be the third consecutive year of outflows from the asset class due to ongoing global growth fears.

Steven Sweeney, Senior Investment Analyst at Lonsec and principal author of the report said, “Sentiment for emerging markets is weak due to concerns about the impact of predicted rate rises in the US, broad currency volatility thanks to a rising Greenback and concerns about China’s ability to manage its economic slowdown.”

Nevertheless, there remained an alpha opportunity in emerging markets for those fund managers applying a top down research process.

“Country factors, which include politics, economic metrics and money flows, continue to have a bearing on performance in emerging markets,” Mr Sweeney said. “For this year, fund managers who positioned portfolios more towards Asia and avoided Russia and Brazil tended to achieve improved performance outcomes.”

“Retail investors and their financial advisers should consider a measured allocation to emerging markets with exposure to higher performing economies, such as Asia, from a long term perspective,” he said.

Challenges in emerging markets

The Lonsec report looks at the performance of 36 emerging market funds during the period for the year to the end of July 2015. The report found that 2014 provided a modest return for emerging market investors with the emerging markets benchmark delivering close to 7% for the year in AUD and 16% for the year to 30 June 2015.

Mr Sweeney said investors and financial advisers need to be aware of ongoing market risk as the segment remains more volatile than global equities.

“Financial advisers should consider client risk tolerance and be mindful of overall exposure to developing economies within the global equities allocation,” he said. “In many ways, the recent swings between buying and selloffs are really just business as usual for emerging markets investors.”

Lonsec also advocates the use of specialist emerging markets funds managers with dedicated personnel and tailored investment approaches to emerging markets.

In terms of ratings, 2015 was notable for a comparatively high degree of ratings movement with three rating upgrades and seven downgrades.

 

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