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Summary

Following a difficult few years, emerging markets are back in fashion and valuations look attractive

3 min read

As developed markets continue to post positive trends in growth so do emerging markets. After a few years of volatile performance, we see global growth and increasingly stable local economies supporting equities and bonds in many developing economies.

As developed markets continue to post positive trends in growth so do emerging markets. After a few years of volatile performance, we see global growth and increasingly stable local economies supporting equities and bonds in many developing economies.

 

Where in the world?

Although there is no agreed definition of what makes an emerging market, these countries share various characteristics. They have relatively young working populations and expanding middles classes, which are both positive for consumer spending. Their governments are committed to economic development and reform programmes as well as opening their financial markets. The potential for rapid growth makes them exciting destinations for investors seeking attractive returns.

The four largest emerging markets are sometimes referred to as the ‘BRICs’ - Brazil, Russia, India and China – a term first coined in a 2001 research report published by Goldman Sachs Asset Management. The name caught the imagination of investors as well as the countries themselves, which now meet annually at formal summits to discuss mutual economic interests. These four countries now represent around 40% of the world population and about 30% of global GDP.

There are many other economies that are considered to be emerging markets. The MSCI Emerging Market Index, a popular benchmark for fund managers, lists 23 (see table). It’s important to note that emerging doesn’t mean ‘small’ – China is the second biggest economy in the world, after the USA, while India is seventh and Brazil ninth. 

“Despite recent strong performance, emerging market equities and bonds look attractive across various measures of value.”

Back to the future

Emerging markets have been through a lot over the past four years. Bond yields soared (prices fell) during the ‘taper tantrum’ in 2013, prompted by fears of a change in US monetary policy. Meanwhile, markets were alarmed by China’s efforts to devalue its currency in 2015, and India controversially removed high-value banknotes from circulation in late 2016. During these periods, emerging markets suffered net investment outflows.

However, 2017 has started more brightly, with all four of the BRICs growing together. Higher oil prices helped Russia although it has agreed production limits with OPEC. Brazil has a new president and is finally emerging from a recession that has lasted two years, while China’s slowdown has been less severe than expected as it shifts to a more sustainable rate of growth.

In anticipation of better times ahead, investment outflows reversed to net inflows last year. Despite recent strong performance, emerging market equities and bonds look attractive across various measures of value. Risks remain but as these regions develop they have the potential to create some of the world’s most successful companies, offering rich pickings for investors.

“Our outlook is based on our long-term view that emerging market holdings will continue to offer good potential for returns ”

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Emerging opportunities

A typical balanced portfolio includes about 5% direct exposure to emerging markets. This is neutral against our own long-term strategic allocation, but represents a more positive view than many investors. Our outlook is based on our long-term view that emerging market holdings will continue to offer good potential for returns as well as the benefits of global diversification.

Our positioning includes exposure to emerging market debt via specialist third-party funds which have in-depth, local market knowledge. As an example of returns, one of our emerging market bond funds has generated a return of 6.5% from when we invested earlier this year.

Where we choose to invest using third-party funds, we follow a rigorous due diligence process. We apply our expertise to select only the best-in-class funds which are not only able to achieve competitive returns but who also employ a similar disciplined and well researched approach inherent within our own investment principles.

If you would like to find out more about our investment views or how to invest with Coutts please contact your private banker or wealth manager who will be delighted to help.

  • Countries in the MSCI Emerging Markets Index

    2016 GDP (in US dollars (billions))

    Brazil

    $1,798.62

    Chile

    $247.03

    China

    $11,218.28

    Colombia

    $282.36

    Czech Republic

    $192.99

    Egypt

    $332.35

    Greece

    $194.25

    Hungary

    $125.68

    India

    $2,256.40

    Indonesia

    $932.45

    Korea

    $1,411.25

    Malaysia

    $296.36

    Mexico

    $1,046.00

    Peru

    $195.14

    Philippines

    $304.70

    Poland

    $467.59

    Qatar

    $156.73

    Russia

    $1,280.73

    South Africa

    $294.13

    Taiwan Province of China

    $528.55

    Thailand

    $406.95

Key Takeaways

After a few years of volatile performance, we see global growth and increasingly stable local economies supporting equities and bonds in many developing economies. Our outlook is based on our long-term view that emerging market holdings will continue to offer good potential for returns as well as the benefits of global diversification.

About Coutts investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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