Emerging markets have fallen far out of favour in recent years, but we may be approaching the point in the economic cycle where they come in from the cold, according to RBC Brewin Dolphin.<\/p>\n\n\n\n
Over the past five years, the MSCI Emerging Markets index has delivered a total return \u2013 capital growth and dividends \u2013 in sterling terms, before charges, of 18.46%, compared to 82.19% for the MSCI World index1<\/sup>. Funds focused on these emerging markets have been affected by a strong US dollar, geopolitical instability, slowing growth, a property crisis in China, and several other challenges in recent years. \u00a0<\/p>\n\n\n\n However, with interest rates appearing to have peaked and the dollar beginning to weaken, the macro-environment is improving for emerging markets. In addition, country-specific risks have begun to dissipate, such as corporate change among South Korea\u2019s family-owned \u2018chaebol\u2019 conglomerates, a turnaround in Argentina\u2019s economy, and governance improvements in Brazil.<\/p>\n\n\n\n An emerging market is generally defined as a nation that is in the process of becoming a developed economy. The countries included on the list differ between investment houses, but generally they tend to include China, Brazil, India, Mexico, South Korea, and Argentina along with several others. <\/p>\n\n\n\n Rob Burgeman, senior investment manager at RBC Brewin Dolphin, said:<\/strong> \u201cMany developed markets are trading at record highs \u2013 the USA, in particular, has had a great run, while the UK and Europe are faring relatively well despite some of the well-publicised challenges their economies face. It\u2019s getting to the point in the cycle where, typically, areas that have underperformed start to turn and become an attractive option again.<\/p>\n\n\n\n \u201cEmerging markets do have some attractive qualities. With the exception perhaps of China, broadly speaking they aren\u2019t facing the demographic challenges that are going to be a big problem for the more developed world in the coming years. And, although there is a bit of a reverse in the trend of outsourcing to China, in all likelihood this will end up being moved to other emerging markets, such as Mexico.<\/p>\n\n\n\n \u201cNot all emerging markets are equally attractive, however. In China, Yum Brands \u2013 the company behind the nation\u2019s Pizza Hut and KFC franchises \u2013 trades on a price-to-earnings (P\/E) ratio of around 16, while the equivalent business in India trades at a P\/E of 1102<\/sup>. India is the most expensive market on the planet by some measures, which means it is probably not the right time to be filling up on Indian stocks. The best emerging markets managers also tend to cycle between different countries, helping to mitigate against big changes in their ratings.<\/p>\n\n\n\n \u201cThe challenges, along with the opportunities, emerging markets present to investors are a good example of why we recommend taking professional advice before making any significant investment decisions. A financial adviser will be able to guide you through how they fit into an investment portfolio and your wider financial objectives.\u201d<\/p>\n\n\n\n Rob\u2019s top five tips for investing in emerging markets:<\/strong><\/p>\n\n\n\n Emerging markets funds:<\/strong><\/p>\n\n\n\n M&G Emerging Market Bond Fund<\/strong> \u2013<\/strong> Rob said<\/strong>: \u201cIn simple terms, this fund allocates about one-third of its exposure to emerging market government bonds in local currencies, which comes with a higher degree of risk; one-third in US dollar-denominated government debt; and one-third in US dollar-denominated company debt. It is a decent yielder at around 6%3<\/sup>, investing in high-yielding bonds from the likes of Mexico, Singapore, and South Africa. It\u2019s not one for the risk averse, but given where we are in the credit cycle this could be an interesting way to play emerging markets without the volatility that comes with equities.\u201d<\/p>\n\n\n\n JP Morgan Global Emerging Markets Income Trust \u2013 Rob said<\/strong>: \u201cThe JP Morgan Global Emerging Markets Income Trust is a well spread fund. You often find emerging markets funds are either heavily skewed towards China or India, but in this instance the two only make up a combined 37% of its exposure4<\/sup>. The big names like Taiwan Semiconductor Manufacturing Company and Samsung are in there alongside Mongolian industrial groups and Indonesian banks, providing a mix of large and small cap holdings. With a yield of around 4% it offers a reasonable level of income, but it also has an ongoing charge of 1.4% meaning it is not particularly cheap5<\/sup>.\u201d<\/p>\n\n\n\n Templeton Emerging Markets Investment Trust \u2013 Rob said<\/strong>: \u201cTempleton\u2019s emerging markets trust is the grandfather of the sector \u2013 it dates back to 1989 and has been a survivor in an area where plenty of others have failed. The trust also has a relatively strong, long-term track record in a highly volatile and sentiment-driven sector. South Korea is its largest geographical exposure, representing just over 20% of the fund, a reasonable proportion of which is made up by different arms of Samsung6<\/sup>. It currently trades at a wider than average discount of more than -15%, offering a dividend yield of around 3.2%7<\/sup>. Its ongoing charge of 1.09% is fairly typical for emerging markets funds8<\/sup>.\u201d<\/p>\n\n\n\n iShares Emerging Markets Index Fund<\/strong> \u2013 Rob said<\/strong>: \u201cFor the more cost-minded, there is the iShares Emerging Markets Index Fund. For the reasons I have already outlined, we don\u2019t think emerging markets lends itself well to passive funds or even some of the tried-and-tested approaches taken in other parts of the world \u2013 the Fundsmith Emerging Equities Trust is evidence enough of that. But, the iShares fund costs just 0.2% and provides exposure to many of the same names you\u2019ll find in other funds dedicated to these markets, with the benefit of a historic yield of around 5.5% to provide a level of protection9<\/sup>.\u201d<\/p>\n\n\n\n Disclaimers<\/strong><\/p>\n\n\n\n The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk<\/a>. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.<\/p>\n\n\n\n RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: 365345640.<\/p>\n\n\n\n 1 Source: Bloomberg, actual returns may have been different – ENDS –<\/strong><\/p>\n\n\n\n Rob Burgeman and his fellow investment managers at RBC Brewin Dolphin put together bespoke investment portfolios for clients based on their long-term objectives and their attitude to risk. The portfolios will have a mixture of hand-picked holdings in them including third party funds and individual stocks that are researched and recommended by RBC Brewin Dolphin\u2019s in-house research team.<\/em><\/p>\n\n\n\n Five-year discrete performance (sterling terms):<\/strong><\/p>\n\n\n\n\n
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2 Source: Bloomberg
3 Source: Hargreaves Lansdown<\/a>
4 Source: Hargreaves Lansdown<\/a>
5 Source: Hargreaves Lansdown<\/a>
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7 Source: Hargreaves Lansdown<\/a>
8 Source: Hargreaves Lansdown<\/a>
9 Source: Hargreaves Lansdown<\/a><\/sup><\/p>\n\n\n\n