Harvey Jones
10.02.2023

Emerging markets have just had a rotten year. That could soon change.
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Remember when emerging markets were all the rage? Well done, because that was 20 years ago and an awful lot has happened since.
Goldman Sachs economist Jim O'Neill gave the emerging markets craze a name in his research note Building Better Global Economic BRICs, published way back in 2001.
It helped trigger a 20-fold rise in overseas investment as investors poured money into Brazil, Russia, India and China, which were sold as young, fast-growing nations that were set to outstrip the ageing, declining West.
A host of new acronyms followed as fund managers jumped on board. Remember the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa)? Or MINT (Mexico, Indonesia, Nigeria, and Turkey)?
How about The Next Eleven (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, Vietnam)?
It didn't last, of course. No investment fad does.
Since then we have been through the financial crisis, Covid pandemic, war in Ukraine and rampant inflation, and the BRICs have had a bumpy ride, notoriously Russia.
Over the last decade, the MSCI Emergency Market Index produced an average annualised return of just 1.44 per cent a year.
That compares poorly to MSCI World, which returned 8.85 per cent a year, while the US delivered a blistering 12.45 per cent.
It turned out that the creaky old developing world still had some life in it.
Yet every serious investor should still have exposure to emerging markets and now might just be a good time to get it. A good benchmark might be 10 to 15 per cent of your portfolio, depending on your attitude to risk.
Given their volatility, it is often better to invest after emerging markets have crashed, rather than jumping onto the bandwagon at the tail end of a boom.
The outlook is the brightest in years, says Giulio Renzi-Ricci, head of asset allocation at fund manager Vanguard Europe. “Emerging markets look attractively valued for the first time since the Covid-19 pandemic.”
Inflation, monetary tightening, slowing global growth and rising political risk triggered steep sell-offs in 2021 and 2022, but that has pulled down share prices and boosted prospective future returns.

Emerging markets still face plenty of challenges, he says, as the strong US dollar drives up the cost of servicing their overseas debts, while the looming global recession won’t help and tensions between the West, China and Russia cast a shadow.
Ye Mr Renzi-Ricci reckons the negative narrative has been oversold and suggests another reason why investors should have exposure. “Emerging market equities still have a relatively low correlation with developed market equities. Having a balanced allocation to emerging market equities can play an important role in portfolios.”
Luca Paolini, chief strategist at Pictet Asset Management, says emerging markets offer investors respite from weak growth and tightening monetary conditions in the West. Pictet is starting 2023 with a “tilt" towards Asian and emerging market equities, particularly China, “amid signs that Beijing is seeking to normalise its pandemic policies”, Mr Paolini says. “Pent-up consumption should be a big boost to the domestic economy, once it gets past Covid.”
Elizabeth Kwik, co-manager of Abrdn China, says Chinese consumers are keen to spend savings built up in lockdown. “The stars are aligned for a meaningful recovery in growth, driven by consumption.”
Rebecca Jiang, co-manager of investment fund JPMorgan China Growth & Income, is also optimistic about the country's long-term economic prospect, which “continues to be bolstered by the strong entrepreneurial ethos of China’s private businesses and growing demand from the country’s burgeoning middle class.”
India has been by far the most rewarding BRIC in recent years, delivering an average annual return of 12.08 per cent over the last decade, according to MSCI.
Its stock market achieved the rare feat of rising last year, if only by 2.96 per cent. India is now the second largest weighing in the MSCI emerging markets index after China, at 15.55 per cent, says Jigar Gandhi, India investment specialist at fund manager Schroders. As a net energy importer, it has been hit by rising prices, but its “equity market remains resilient on the back of a strong domestic economy”, he says.
Mr Gandhi calls India "an island of growth in a weak global environment”. "The IMF suggests its economy will grow at 6.1 per cent in real terms in 2023, beating other China (4.6 per cent) and the US (1 per cent). This is largely due to growth in a strong domestic-oriented economy where exports are only 13 per cent of total GDP.”
Most private investors will gain exposure to the sector via a generalist emerging markets fund, and there are plenty of exchange traded funds (ETFs) to choose from. Each has a slightly different remit and regional allocation, so it is worth checking if it matches your needs if simply repeats what you already have.
The popular Vanguard FTSE Emerging Markets UCITS ETF gives investors exposure to 1,981 different companies. It has a 35 per cent allocation to China, 17 per cent to India, 15 per cent to Taiwan and 6 per cent to Brazil. South Africa, Thailand, Mexico, Indonesia, Malaysia and several Middle Eastern markets also feature.
The iShares MSCI EM UCITS ETF has a similar allocation, but with less exposure to China at 23.66 per cent, and more in South Korea, which makes up 11.86 per cent of the fund. Another popular fund, Amundi Index MSCI Emerging Markets UCITS ETF, has a similar profile.
There is plenty of crossover when it comes to individual stocks, too. Taiwan Semiconductor Manufacturing is coincidentally the top holding in all three funds, while Chinese tech giants Tencent Holdings, Alibaba Group, Brazilian mining company Vale and Indian giants Infosys and Reliance Industries are top 10 holdings across all three funds.
More sophisticated investors might prefer to target individual country ETFs. There are plenty to choose from.
The emerging markets craze may have passed, but the investment case is intact. The timing might be just right.

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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