Emma Wall: Hello, and welcome to the Morningstar series, Ask the Expert. I'm Emma Wall and joining me today is Morningstar analyst, Karine Nowak to talk about emerging markets.
Hello, Karine.
Karine Nowak: Hello, Emma.
Wall: So, this month two countries have actually been promoted from frontier status to emerging market status. These are the United Arab Emirates and Qatar. I think most people will expect that these two countries are simply chock-full of energy stocks and that's all they're going to be bringing to the MSCI Emerging Market field, but that's not necessarily the case, is it?
Nowak: No. Actually there are a number of financial stocks which are also part of their local markets and that all are going to be joining the MSCI EM Index. So it is going to bring a slightly different kind of take on the region on these two countries in particular.
Wall: And bumping up into the emerging markets sector has a very positive effect on the countries that are awarded this status, doesn't it? What can we expect from the economy and from the stock market following this promotion?
Nowak: Well, it's going to have several kind of positive impacts obviously. This is going to be making the local stocks available to a broader range of investors. So you would imagine that lots of EM investors are now going to be looking at these specific companies in these specific countries.
So, obviously in terms of liquidity, it is going to have an impact and in terms of attractiveness to EM investors, in general, and also in terms of increasing the kind of corporate governance of some of these companies and may be bringing new companies that would be – new stocks that would be quite prominent in the local markets through kind of the EM Index and EM investors, in general. So it is expected to be quite positive.
Wall: As you mentioned, these are very small markets. So I don't think that we would ever be saying to private investors go out there and chuck in a load of money, a big proportion of your portfolio. Perhaps the most sensible approach especially for private investors, non-professional investors would be to have an emerging markets fund that perhaps takes advantages of these smaller players, the smaller emerging markets, and some of the frontier market. Do we have any Morningstar analysts' Gold-rated funds that do that?
Nowak: We have the First State Global Emerging Markets Fund that takes advantage of some of the smaller markets, but I would say it's maybe more at the margin. So, for example, they would have some exposure to some of the Nigerian stocks, so Nigeria is about 20% – it's going to be about 20% of the index, of the frontier index, once UAE and Qatar are moved to the EM Index. And also they play on Nigerian banks because obviously the demographics are quite strong in Nigeria and they can take advantage of no/low credit penetration in general.
So, definitely this would be one to think about, but let's say if you want kind of a broader exposure to some of the smaller markets, it's actually maybe some of the smaller funds that would provide this type of exposure. So, thinking about funds like the Somerset funds or Somerset Global Emerging Markets and Emerging Market Dividend Growth, and also the Polar Capital Emerging Market Income. They would have some exposure to maybe some of the Qatar banks, for example, UAE banks, and also maybe some of the Nigerian stocks as well. So, you would find maybe more broad-based approach and exposure to smaller markets in general.
Wall: And these smaller markets can have a faster rate of growth. They can also be quite volatile. So that's something for investors to look out for.
Nowak: Yes exactly. It's something that when we talk to managers actually about some of the smaller markets and some of these stocks that they picked in these markets very much down to the liquidity of the underlying stocks and also the in-depth bottom-up research. So, in this case corporate governance is definitely one of the main risks to investing in some of the smaller markets and some of these stocks, and also political risk, in general, is definitely at the top of the agenda when the managers meet with these companies.
But it's an interesting part of the market to explore and some of them are actually very keen to play into the emerging kind of consumer stories. So, for example, Fidelity Emerging Market has quite strong exposure to Nigerian general, but also to some South African stocks that would benefit from the growing consumer in sub-Saharan Africa, in general.
Wall: So some very interesting opportunities, a bit of risk, some reward, and a niche holding in a portfolio?
Nowak: Yeah definitely.
Wall: Karine, thank you very much.
Nowak: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
