Harvey Jones
15.08.2023

Investors need to start talking about emerging markets again
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There was a time when investors couldn't stop talking about emerging markets. Brazil, Russia, India and China, collectively labelled the BRICs, dominated conversations at the start of the Millennium.
These potential economic powerhouses boasted young, fast-growing populations, heaps of natural resources, and an emerging middle class that was keen to emulate Western living standards.
Their economies were growing at four or five times the speed of the tired developed world and investors wanted to share in the excitement.
Better still, their stock markets looked cheap after the 1997 Asian crisis and while further volatility was to be expected, the opportunity was huge. Global money poured in but like every hot investment trend, it didn't last.
The 2007 financial crisis hit emerging markets hard, as exports fell, debts multiplied and investors lost their appetite for risk.
Then everything went quiet.

Tech strikes back

Talk turned to a hot new investment acronym, the FAANGs, which stood for Facebook, Apple, Amazon, Netflix, Google-owner Alphabet and other US tech titans such as Tesla.
While the MSCI Emerging Markets Index suffered a “lost decade”, stumbling along at an average rate of just 2.95% a year, the US went off like a rocket.
Its stock markets have delivered an average annualised return of 12.79% a year for the last decade, measured by the MSCI USA index.
That rose to 21.22% a year for tech stocks.
At the start of the year, Jitania Kandhari, part of the emerging market equity team at Morgan Stanley, tried to start a new conversation about emerging markets.
She said the 2010s were their worst decade since the 1930s but the next decade would belong to them.
The trigger was expected to be China’s emergence from strict Covid lockdowns, but after a bright start, China’s recovery floundered.
Investors still don't want to talk about emerging markets but maybe it’s about time they did.

There’s value out there

Nafeesa Zaman at fund manager Fidelity International says emerging markets are now their cheapest since 2002 and look more resilient. “They typically have less dollar-denominated debt, which has caused problems in recent years amid dollar surges, and more significant foreign exchange reserves.”
Inflation is also less of an issue, too. “High commodity prices are helping emerging markets with relatively large mining industries, such as South Africa, Mexico and Brazil.”
The clean energy transition may further boost commodity exporters, as it requires substantial amounts of metals such as copper, nickel, cobalt, manganese, graphite and lithium.
At the same time, US shares now look overpriced following the hype over artificial intelligence.
Zaman notes that while Nvidia has soared more than 200% year-to-date, the Taiwan Semiconductor Manufacturing Company is up just 25%.
This leaves Nvidia trading at around 200 times earnings, while TSMC trades at just 15 times. “Nvidia outsources the manufacturing of its chips to companies like TSMC and could not exist without it, making the difference even more surprising.”
There may be an opportunity here and it is worth checking your emerging markets portfolio exposure. About 10% to 15% would suit most.
The next question is how to invest.

Performance has varied

Lumping Brazil, Russia, India and China together under the catch-all BRICs label was always simplistic and subsequent performance has been wildly different.
Russia is off limits following its invasion of Ukraine. The glory days of double-digit Chinese GDP growth are over, despite repeated stimulus, while President Xi Jinping’s ambitions have put the West on its guard.
Inflation-ravaged Brazil has had a bumpy time both politically and financially, but it’s now staging a comeback. The Brazil MSCI has rocketed an impressive 29.81% over the last 12 months.
Of the four BRICs, the Indian stock market has been most rewarding, growing at an average rate of 12.59% a year over the last decade, which is only slightly less than the US.
James Thom, co-manager of the abrdn New India Investment Trust, says the Indian economy is still in the early stages of a cyclical upswing. “Government policy remains supportive with sufficient fiscal discipline to not worry investors.”
Mexico, Taiwan and South Korea have also outperformed, according to Lazard Asset Management, while Eastern Europe beat the Middle East or Africa. Lazard notes that Greece is the best-performing emerging market of 2023 so far. MSCI Greece rocketed 43.45% in the six months to 30 June.

Track the recovery with an ETF

The simplest way to play the emerging market recovery is with a broad-based emerging markets exchange traded fund (ETF) like the SPDR MSCI Emerging Markets UCITS ETF or Amundi Index Emerging Markets UCITS ETF.
Otherwise investors can plug portfolio gaps with a regional ETF like the Vanguard FTSE Pacific ETF or the MSCI Emerging Markets Latin America index.
There is an endless range of individual country ETFs for investors chasing specific opportunities, from Franklin FTSE India ETF to Lyxor MSCI Brazil UCITS ETF or the iShares MSCI China Small-Cap ETF.
Another way to play the recovery is by investing in Western multinationals with exposure to emerging market consumers, such as L’Oreal and Nike, says Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity Fund, “They can pick up the stronger organic growth without the volatile emerging market currency effects on their own share prices.”
A host of other Western names also offer emerging market exposure, including Procter & Gamble, baby-formula maker Mead Johnson Nutrition, food and beverage conglomerate Mondelez International, PepsiCo, Coca-Cola, personal care products maker Kimberly-Clark, home-appliance giant Whirlpool Corp, consumer goods giant Unilever and Estée Lauder.
Investing is never without risk and emerging markets could potentially suffer a second lost decade.
Yet investors need to start talking about the opportunity here. Those who invest ahead of the recovery will have most to shout about.

Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.

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