Emerging markets have not performed well of late, buffeted by the fallout from pandemic, Russia’s invasion of Ukraine, rising inflation, mounting debt and surging energy prices.
There are fears around what a possible Chinese storming of Taiwan could do to the world economy.
China’s economic growth is restricted, the result of a problematic property sector and a zero Covid policy.
It has all been bad news for investors.
Over the past three years, the average global emerging markets fund has lost 0.4 per cent, according to FT Adviser. During the same period, the average fund in the IA Global Equity sector is up around 24 per cent. Only two from 123 global emerging markets funds delivered a positive return in the first six months of 2022.
Dabbling in the sector has always been seat-of-your-pants given greater volatility and risk when compared with developed markets. Perhaps it has never been this tough, given the ‘perfect storm’ we have been witnessing, but it shouldn’t have come as a surprise.
The International Monetary Fund classifies Argentina, Brazil, Chile, China, Colombia, Egypt, Hungary, India, Indonesia, Iran, Malaysia, Mexico, the Philippines, Poland, Russia, Saudi Arabia, South Africa, Thailand, Turkey, and the United Arab Emirates as emerging markets, based on data such as GDP per capita, exports of diversified goods and services, and level of integration into the global financial system.
The 20 account for 34 per cent of the world’s nominal GDP in US dollars and 46 per cent in purchasing-power-parity terms.
Of these, Russia is by far the standout bogeyman. Emphasising the crucial importance of diversification, fund managers are having to write down the value of Russian stocks and bonds held within portfolios to zero.
Elsewhere, it is some of the smaller nations who have been suffering the most.
El Salvador’s adoption of bitcoin as legal tender has backfired spectacularly. Sri Lanka has been mired in political and economic chaos and defaulted on its debts in May. Argentina is no stranger to debt defaults either, with inflation set to exceed 75 per cent this year.
Kristalina Georgieva, head of the International Monetary Fund (IMF), noted: “The situation is increasingly grave for economies in or near debt distress, including 30 per cent of emerging market countries and 60 per cent of low-income nations.”
Nevertheless, all is not doom and gloom.
The long-term outlook for emerging markets is more positive, with China and India set to overtake the US in terms in GDP over the next 8-30 years.
Today, many emerging market economies are in a much stronger position to ride the current wave of negativity.
The IMF stated: “Emerging markets have made remarkable progress in strengthening their macroeconomic policies since the turn of the century, which helped them more than double per capita incomes on average. Monetary policies in 65 per cent of the countries we have identified as emerging markets follow forward-looking inflation-targeting regimes. Public finances in several are guided by fiscal rules. Many embraced major banking sector reforms after the financial crises of the 1990s.”
Gustavo Medeiros, head of research at specialist emerging markets fund house Ashmore, told FT Adviser: “China is the engine of global growth, and the US issues the reserve currency of the world, so when Chinese growth slows down and US rates increase, as we have witnessed since 2H 2021, emerging market asset prices are challenged.”
However, looking forward, he added: “Better growth, led by a recovery in China, and fewer uncertainties around interest rates in the US, will bring a supportive environment for emerging markets.”
A case then of headwinds now, but lots of potential for the future.