Emerging markets investors have been rewarded over the recent past, with the MSCI Emerging Markets index outperforming the global index in both 2016 and in 2017 to the end of April. 2016 saw market leadership from value-orientated companies and this was clearly seen in the relative performance of indices and investment funds both globally and in emerging markets. To date, 2017 has seen a reversal of this trend, with the growth style outperforming.
This change in market leadership has produced testing conditions for managers in terms of producing consistent outperformance. Generally, funds that have a growth style such as Comgest Growth Emerging Markets, Hermes Global Emerging Markets and Fidelity Emerging Markets, have outperformed year to date, after underperforming in 2016. The opposite can be said of certain managers with a value bias.
There have, however, been some managers that have performed well in both environments through a combination of stock selection and asset allocation. Funds in this group include TT Emerging Markets Unconstrained, T. Rowe Price Emerging Markets Value, Goldman Sachs Emerging Markets CORE Equity, UBS Global Emerging Markets Opportunity and JPM Emerging Markets Equity.
Looking to the future, it is clear that recent performance has weakened the valuation argument in favour of emerging markets, with valuation levels now close to average, both in absolute terms and relative to global equities. That said, within the diverse markets in the emerging space there will always be areas of value for active managers to exploit, be they short-term traditional value opportunities or longer-term under-appreciated growth situations.
Earnings estimates for emerging markets are suggesting a return to healthy growth in 2017, following years of flat or negative numbers, driven by the technology, financials and energy sectors. The return to growth has made emerging markets equities relatively more attractive, but it will not be plain sailing, as both global and country-specific macro risks remain. This indicates not only the potential for continued good returns from the asset class, but also plenty of scope for talented active managers to outperform.
