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Emerging markets: a tale in two parts

Most emerging economies have suffered in 2020, but the strong performance of China has buoyed the sector.
December 18, 2020
  • Gap between EM winners and losers has widened
  • Region still offers long-term growth potential

So far the pandemic has split the fortunes of stock markets across emerging markets. A number of Asian countries, including China, Taiwan and South Korea, managed to contain the virus much more effectively than most western countries, leading to significantly less economic damage and buoyant stock markets following the sell-off in the first quarter.

Other countries have had a much tougher time. India, Mexico and Peru have all had severe outbreaks, with high death tolls and real gross domestic product forecast to contract by at least 8 per cent over the year. Brazil has been badly affected, with more than 170,000 recorded coronavirus deaths, and Russia saw month-on-month cases triple as it entered the final quarter of the year. China, meanwhile, is the only major economy expected to grow in 2020, with FactSet data projecting GDP growth of 2 per cent for the year.

On top of their own battles to contain the virus, what happens in the rest of the world has an outsized influence on most emerging countries. Economies most vulnerable are those with a heavy reliance on global trade, tourism, commodity exports and external financing. Many African countries have suffered severely from dwindling demand for their exports, and a sharp supply drop in labour intensive sectors such as mining and manufacturing amid lockdowns. Thailand has suffered from the collapse in tourism, and exports from Russia and Colombia plummeted along with the fall in the oil price.

Fortunately the buoyancy of the Chinese economy has softened the blow for many developing countries. About a third of all Chile’s goods exports and a fifth of Vietnam’s go to China, according to Deloitte, who said these countries had already seen exports rise above their 2019 Q4 levels in dollar terms by June. Countries with large shares of technology-related exports, such as Malaysia, have seen export growth rebound more quickly. And higher prices of gold and copper have boosted export revenue in a handful of emerging countries, including South Africa. 

Table 1 shows how some of the biggest constituents of the MSCI emerging markets index performed in the year to 1 December. The figures, shown in sterling terms, expose a huge disparity between the best performing and the worst. 

While most emerging economies and stock markets have suffered badly this year, the index is heavily dominated by China so the overall performance in emerging markets looks strong. China, Taiwan and South Korea accounted for 28 per cent of the MSCI emerging markets index in October. 

The index is also dominated by a handful of companies, with Alibaba (HK:9988), Tencent (HK:0700), Taiwan Semiconductor Manufacturing (TAI:2330) and Samsung Electronics (KR:005930) making up a quarter of it at the end of October. All of have seen strong share price growth this year as demand for technology and online services has soared. 

A number of emerging market funds have had very strong growth this year, particularly those with a pivot towards Asia and technology. Below is a list of the top five performing funds, for the year to 1 December.

 

Table 1. Performance of MSCI biggest constituents

 
  
MSCI Taiwan28.4%
MSCI China26.0%
MSCI Korea25.5%
MSCI EM11.0%
MSCI India5.9%
MSCI Mexico-5.9%
MSCI South Africa-10.9%
MSCI Thailand-14.0%
MSCI Russia-19.3%
MSCI Brazil-25.9%

 

Table 2. Top-performing funds this year     
FundYear to dateOne yearThree yearsFive years10 years
Carmignac Portfolio Emergents51.557.7453.92118.63 
Aubrey Global Emerging Markets Opportunities 42.9245.7659.66  
BNY Mellon Global Emerging Markets42.8848.1343.34124.87 
Carmignac Gestion Emergents41.0847.0540.1896.7388.83
Threadneedle Global Emerging Market Equity2632.2740.24104.8484.19
Baillie Gifford Emerging Markets Leading Companies25.5532.4445.88147.49134.69
Quilter Investors Emerging Markets Equity Growth25.0728.7648.87147.74 
JPM Emerging Markets 23.4527.0445.20141.27112.26
Candriam Equities L Emerging Markets 23.1630.5024.43  
Baillie Gifford Emerging Markets Growth20.9527.6337.96131.14124.45
      

Source: FE Analytics, data to 01/12/20. Primary share classes used