The attractions of emerging markets are well documented. These fast-growing economies are armed with favourable demographics, in the shape of young, increasingly upwardly mobile populations. This means plenty of taxpayers and spenders, which in theory should hopefully translate into positive stock market returns.
But investors need to strap themselves in for the long term – this is a high risk area that can fall quickly out of fashion. Last May for example the average emerging market open-ended fund had lost 10 per cent over the past five years, and was also showing a decline of 11 per cent on a one-year view.
Fast-forward 16 months, and emerging market funds have staged a remarkable recovery, with the average open-ended fund up 49.2 per cent (since 1 May 2016), according to FE Trustnet.
Emerging market focused investment trusts have also rallied, but the sector average return is noticeably lower, showing a total return of 38.2 per cent.
One of the reasons why there’s a performance gap is a factor that investors looking to enter or boost exposure to emerging markets can use to their advantage: discounts on emerging market trusts have remained static, as stockbroker Stifel points out.
‘Over the last two years emerging market trusts have delivered strong returns, yet they continue to languish on double-digit discounts as investors continue to focus on developed markets,’ explains Anthony Stern, an analyst at Stifel.
Stern picks out Templeton Emerging Markets and JP Morgan Emerging Markets as his two top picks, both currently trading on discounts of 11 per cent. He also likes Aberdeen Emerging Markets, offering a higher discount of 13 per cent. ‘(The trust) has undertaken a number of positive structural changes and faces a continuation vote in the next few months,’ says Stern.
He adds that investors buying today have not missed the boat, despite the strong performance emerging markets have enjoyed of late. ‘Valuations across the emerging market space do not look stretched, and the collapse in commodity prices combined with rise of the tech sector has meant the region is no longer just a commodity play,’ he says.
Other experts, including Ben Yearsley of Shore Financial Planning, also remain bullish. ‘In the month of August riskier assets did well again, with emerging markets and Asia giving decent returns. I've been positive on these sectors for a number of years now and continue to believe they offer excellent long term growth prospects,’ Yearsley says.
Moreover, all five panellists in our multi-asset panel are overweight the emerging market region, pointing out that valuations remain cheap, particularly when pitted against other equity markets such as the US.
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