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Emerging market share price falls seem to have stalled – is this a time to buy?
October 4, 2018

The trials and tribulations emerging markets (EMs) have been through in 2018 are well documented. The regions, in particular China and the Asia Pacific, have seen domestic share prices hit hard as investors exit amid fears that a trade war between the US and China could destabilise economic growth.

IC TIP: Buy
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points

Good entry point from trade war volatility

Strong long-term track record

Growth, valuation and ESG discipline

Exposure to leading companies

Bear points

Fund can lag bull markets

Short-term issues for EMs

Added to this, there have been currency crises in Argentina and Turkey, the US dollar has been strengthening and the US Federal Reserve has been raising interest rates – both traditionally bad signs for emerging market economies and companies – particularly those with dollar-denominated debt.

The MSCI Emerging Markets index was the worst-performing major investment market – down 8.2 per cent – until the middle of September, as sanctions flew between China and the US. However, the last round of sanctions announced by Donald Trump was met with a muted response by investors, and the index has since started to rise.

There are several reasons to remain nervous over short-term sentiment, particularly given the geopolitical uncertainty, but the recent muted response suggests the market thinks share prices have fallen far enough. This leaves a good entry or re-entry point for those wanting access to the long-term growth on offer in emerging markets.

One method to get this is via the IC Top 100 Hermes Global Emerging Markets Fund (IE00B3DJ5K90), managed by Gary Greenberg. The manager has run the fund since 2011, a period when emerging markets have been in and out of favour, providing a good range of scenarios in which to analyse performance.

His strategy is built around picking companies based on their own merit, rather than making macro calls on country stock markets. Stocks are evaluated based on their long-term growth potential but with a strong focus on valuations; so quality stocks that's expected to rise. There is also a strong focus on environmental, social and governance records of companies. Combined, these make the fund slightly more defensive, which means it can lag the index if emerging markets rise on sentiment rather than fundamentals. According to Morningstar, on average over five years the fund captures 136 per cent of the rise in the index, but only 81 per cent of the fall.

Despite the potential to lag, the fund has outperformed over the long term, returning 78 per cent over five years versus 47 per cent for the index and an Investment Association Global Emerging Markets sector average of 40 per cent.

Breaking down Mr Greenberg’s performance over his tenure shows how he has done in different environments. Within each individual year from 2012 to 2017, only in 2012 did the fund not beat the MSCI Emerging Market index, returning 8.2 per cent versus 13 per cent of the index. In 2013, while the index fell 4.4 per cent the fund returned 7.9 per cent, and in 2017 even though the index rose 25 per cent, the fund returned 35 per cent.

The manager’s stock selection is tech-heavy, with the top five holdings of Tencent (HKG:700), Taiwan Semicondutor (TAI:2330), Samsung Electronics (KRX:005930), Alibaba (NYQ:BABA) and Techtronic Industries (HKG:669) all either internet companies or involved in technology manufacturing. The portfolio is made up of only 51 stocks with the top five accounting for 28 per cent of assets, so it is relatively concentrated. Financials and consumer stocks are also large sector exposures, and overall the fund is built up of mega- and large-cap companies with a growth bias.

Mr Greenberg’s strategy has many plaudits, but this is the first issue to consider. The fund is already over $4bn (£3.1bn), a size which brings investment complications. Investors should also account for the fact that emerging markets are more susceptible to sentiment-driven movements than developed markets, and the fund may underperform. The concentrated strategy could make the fund more volatile in an already volatile market.

Nonetheless, there is little doubt over the growth potential of emerging market companies, even if short-term noise dampens returns. Hermes Global Emerging Markets offers investors access to the leading companies and at the right price. Buy. TL

 

Hermes Global Emerging Markets (IE00B3DJ5K90)

PRICE191pMEAN RETURN15.13%
IA SECTORGlobal Emerging MarketsSHARPE RATIO1.05
FUND TYPE Open-ended investment companySTANDARD DEVIATION13.46%
FUND SIZE£3.1bnONGOING CHARGE1.12%*
No OF HOLDINGS51*YIELD0.00%
SET UP DATE09/12/2008*MORE DETAILShermes-investment.com
MANAGER START DATE01/07/2011*  

Source:  Morningstar, as at 01/10/2018 *Hermes Investment Management

 

Performance

Fund/index1-year total return (%)3-year cumulative return (%)5-year cumulative return (%)
Hermes Global Emerging Markets-0.4275.7978.24
MSCI Emerging Markets index1.8763.4146.81
IA Global Emerging Markets sector-2.355.2439.37

Source: FE Analytics as at 01/10/2018

 

Top ten holdings as at 31/08/2018 (%)

Tencent7.75
Taiwan Semiconductor6.6
Samsung Electronics6
Alibaba4.94
Techtronic Industries3.11
KB Financial3.00
China Construction Bank2.89
AIA2.7
ICICI Bank2.51
Samsonite2.35

 

Geographic breakdown as at 31/08/2018 (%)

China35.47
India13.93
Taiwan12.91
South Korea10.71
Brazil6.23
Mexico3.74
South Africa3.30
Russia2.98
United Arab Emirates2.71
Hungary1.97

Source: Hermes Investment Management