Why we see an opportunity in Emerging Markets

We have taken the decision to move to an overweight position in Emerging Market equities in our multi-asset portfolios.

What are Emerging Markets?

An Emerging Market is a country that is still growing and not yet considered fully developed. The countries that represent the largest weightings in the MSCI Emerging Markets index are China, India, Taiwan, South Korea and Brazil.

Why are they important?

In multi-asset portfolios it is essential to have exposure to different regions and sectors to provide diversification. To add value and drive outperformance we regularly consider which regions may demonstrate greater opportunities relative to others, and then look to take advantage of this.

Emerging Market nations offer the potential for significantly faster economic growth as they catch up with more developed countries. They can also provide important diversification benefits for investors, as their stock markets may perform differently to those in the developed world. However, they can be more volatile and more susceptible to political risk and currency fluctuations.

What did we consider when making this decision?

We focus on four areas when we consider how we position our portfolios: macro data (GDP, inflation, unemployment), fundamentals (valuations and earnings), technicals (investment flow data) and agencies (government and central bank policies). We use all this information, as well as views from other fund houses and managers in the region, to decide on the optimum balance of different assets for our investors.

Why are we positive on Emerging Market equities?

We believe the outlook for Emerging Markets is the most positive it has been for a number of years.

China is fundamental to our view. Property sector issues, increased regulation of technology companies and strict Covid measures have reduced growth and severely impacted Chinese equity markets. However, we believe the relaxation of the zero-Covid policy will act as a catalyst for change, which will lead to increased consumption and demand, not just in China but across the region. China also has significantly lower inflation than most other countries and this gives the People’s Bank of China (PBOC) more room to manoeuvre to stimulate economic growth.

Looking at Emerging Markets more widely, we are seeing inflation trending lower, as it is in developed countries. Significantly though, a number of Emerging Market nations began raising interest rates much earlier than their developed counterparts. We believe this puts them in a stronger position to bring inflation under control and begin reducing interest rates sooner. Brazil is likely to be one of the first economies to start cutting interest rates in 2023. Broadly speaking, across Emerging Market nations GDP growth projections appear strong and unemployment data is generally trending lower.

Valuations are another key consideration. The sell-off throughout 2022 (and 2021 in some cases) means company valuations look very attractive in Emerging Markets. In many cases, they are at levels not seen since the Global Financial Crisis. We also believe earnings downgrades started to be factored into valuations much earlier than in the developed world, where this process is only just starting.

Geopolitical concerns are continuing to drive volatility in markets. China-Taiwan tensions have, for example, received substantial media coverage. What have received less attention are what we believe to be good reasons to expect an easing of hostilities this year. Taiwan has presidential elections in early 2024 and the incumbent, Tsai Ing-wen, of the Democratic Progressive Party (DPP), is not eligible to seek a third term. The opposition party, Kuomintang (KMT), is friendlier towards Beijing and has performed well in local elections. China has already dialled down its hostile rhetoric and we expect this to continue as the year unfolds, because having a more pro-Beijing party in power is likely to benefit China’s long-term goals.

How are we positioned?

Our Emerging Markets positioning was more defensive in 2022. We favoured equity income-style strategies focusing on companies with strong and stable cash flows and good market share. We have started to move our exposure towards core funds and those that exhibit a growth style-bias. This should benefit our portfolios if markets move upwards, as we anticipate they will. We continue to meet with fund managers who have specialist expertise in Emerging Markets. Their insights are invaluable in helping us understand the Emerging Markets landscape. We use these views, along with our own research and analysis, to add value in our portfolios.

Scott Truter, Investment Analyst, 19/01/23

Sources: Marlborough multi-asset investment team, Goldman Sachs, Morningstar, Trading Economics, Macrotrends

Risk Warnings 

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. The funds may have exposure to bonds, the prices of which will be impacted by factors including; changes in interest rates, inflation expectations and perceived credit quality. When interest rates rise, bond values generally fall. This risk is generally greater for longer term bonds and for bonds with higher credit quality. The funds invest in other currencies. Changes in exchange rates will therefore affect the value of your investment. The funds may invest a large part of its assets in other funds for which investment decisions are made independently of the fund. If these investment managers perform poorly, the value of your investment is likely to be adversely affected. Investment in other funds may also lead to duplication of fees and commissions. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or In a timely manner. All or part of the fees and expenses may be charged to the capital of the funds rather than being deducted from income. Future capital growth may be constrained as a result of this.

Regulatory Information 

This material is for distribution to professional and retail clients. It’s provided for general information purposes only and is not personal advice to anyone to invest in any fund or product. Information taken from trade and other sources is believed to be reliable, although we don’t represent this as accurate or complete and it shouldn’t be relied upon as such. Calls will be recorded for training and monitoring purposes. 
Issued by Marlborough Investment Management Limited, authorised and regulated by the Financial Conduct Authority (reference number 115231). Registered office: PO BOX 1852 Lichfield, Staffordshire, England, WS13 8XU. Registered in England No. 01947598. Investment Fund Services Limited (IFSL) is the Authorised Fund Manager of the Fund. IFSL is registered in England No. 06110770 and is authorised and regulated by the Financial Conduct Authority. Registered office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Copies of the Prospectus and Key Investor Information Documents are available from www.ifslfunds.com or can be requested as a paper copy by calling 0808 178 9321 or writing to IFSL at the registered office above. This commentary may contain FTSE data. Source: FTSE International Limited (“FTSE”) FTSE 2023. “FTSE” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.