Will emerging markets reward in 2023?

Emerging markets have excited investors for years – their potential for better-than-expected returns is pretty hard to beat. Unfortunately, the possibility of strong returns can go hand-in-hand with increased volatility, especially in comparison with more developed markets.

Here we recap the pros and cons investing in emerging market equities – and highlight some funds covering these areas that are worth considering.

Pros and cons of emerging markets

Emerging markets are home to some of the world’s fastest growing economies, according to Franklin Templeton’s Chetan Sehgal. He highlights China, South Korea, and Taiwan, which have expanded significantly over the past three decades, with each market having its own nuances and a distinct economic and financial evolution.

“While some have grown as suppliers of resources, others have developed as providers of manufacturing expertise, either by offering services or because of their large, untapped consumption potential,” he said.

The region is also home to companies involved in new technologies, such as electric vehicle battery producers and semiconductor designers. However, there are potential downsides. “Because each emerging market is unique and constantly evolving, investing in them can sometimes be unpredictable,” added Chetan.

He also highlighted how the International Monetary Fund (IMF) has cut its forecast for emerging market GDP growth to 3.7% in 2023, excluding China. “This is further compounded by slower earnings growth, rising interest rates, and global recession risk, creating headwinds for emerging markets,” he said.

China and India: the two largest emerging markets

After a challenging couple of years, the Chinese equity market has started recovering – and the main catalyst has been the reversal of China’s zero Covid-19 policy, according to the Alquity emerging markets team. In an update, they highlighted the Chinese government’s announcement of a new 10-point easing plan in addition to the 20-point schedule announced in November. 

“After significant damage to the Chinese economy, the ‘shop’ is now open again,” they wrote. “China’s return to growth will be a massive catalyst in 2023 for emerging markets.”
Alquity suggested this change in emphasis could result in policymakers announcing a growth target of around 5% for the new year. “To get there we’ll see further monetary, fiscal and property measures announced to support the recovery and hit that target,” they added.

Risks remain, not least because of ongoing geopolitical tensions, but valuations are very compelling.

The team is also positive on India’s prospects. “The Indian sub-continent is another interesting opportunity for 2023 and will be better insulated from the slowdown in developed markets next year,” they wrote.

Alquity believes growth of 6%+ should be achievable thanks to the support from structural factors, such as favourable demographics and rapid urbanisation. “Prices are not cheap however,” the team added. “It would be advisable to use an active investor there rather than take passive exposure.”

Funds to consider

Here we highlight five investment funds covering the emerging markets that could be worth considering if you fancy getting exposure to these areas. As well as more country specific portfolios, we’ve included some generalist funds that embrace more than one emerging area.

Invesco China Equity

The aim of this fund, which is run by Hong Kong-based Mike Shiao, is to achieve long-term capital growth through a portfolio of investments with exposure to the Chinese economy.
Stock selection is based on the manager’s assessment of valuation, while the fund adopts a flexible approach with no inbuilt bias to sector or market capitalisation. According to the most recent factsheet, the fund’s 10 largest holdings include Tencent, Alibaba Group and China Construction Bank*.

GS India Equity Portfolio

This is an all-weather India fund that benefits from a solid investment process, as well as an experienced and well-resourced team based in Asia. Its manager, Hiren Dasani, who began managing the portfolio back in 2013, boasts a very good and consistent record at the helm.
The fund’s most recent factsheet details a broad sector allocation. Financials has the lion’s share with 25.8% of assets under management, followed by information technology with 14.3%**.

Aubrey Global Emerging Markets Opportunities

This fund aims to achieve capital growth over the long-term and invests at least 95% of its assets in shares of emerging market companies. Andrew Dalrymple, its lead manager, invests in companies that offer products and services to upwardly mobile, ambitious, and aspirational consumers. According to the most recent fund factsheet, India has the largest country exposure at 44.2%, followed by the 25.2% in China. Other exposures include Indonesia, Thailand, and Mexico**.

Federated Hermes Global Emerging Markets SMID Equity

This fund, which is managed by Kunjal Gala, the company’s head of global emerging markets, focuses on small and medium sized companies. Of course, this presents other potential risks for would-be investors. Emerging market regions can be volatile and investing in smaller firms adds another tier of risk. But the longer-term potential of both of these aspects can also be very rewarding. “We use a long-term approach to identify the winners from structural changes in emerging economies: high-quality, efficient and sustainable companies,” explained Kunjal.

FSSA Global Emerging Markets Focus

This fund aims to achieve capital growth over the medium to long term – at least three years – and invests at least 70% of assets in the shares of large and mid-sized companies. Although there are around 36,000 stocks in the investment universe, manager Rasmus Nemmoe and his team put together a concentrated portfolio of 40-45 best ideas. Each of the companies chosen for inclusion will be a quality name that can demonstrate sustained and predictable growth over the long-term. The fund also has a strong ESG ethos.

*Source: fund factsheet, 30 November 2022
**Source: fund factsheet, 31 October 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.

Published on 15/12/2022