Should you bet on emerging markets for your ISA?
In recent decades, savers have been looking further afield when it comes to making decisions for their Stocks and Shares ISA allowances.
But after a shaky start to 2014, are emerging markets a good bet for your ISA?
Ayesha Akbar, Portfolio Manager for Fidelity Solutions, gives her view on emerging markets, and what their recent tumult could mean for savers.
Why have emerging markets fallen in the last couple of months, and what do these events mean for the longer term?
“It’s certainly been an interesting start to the year for emerging markets. We’ve had continuing protests in Turkey, we’ve had the Argentinian peso collapsing, we’ve had concerns over the Chinese shadow banking industry, and of course recent events in the Ukraine – and we’re only two months into the year.
“The important thing to remember about all of these is that they are mostly country specific events – and Argentina and Ukraine are not part of the emerging market universe. And while Turkey is more linked in, especially for Europe a lot of the noise recently has been around politics. China’s banking is for now under control, although it will be something to watch very carefully. The good news is that events like this can provide good entry points for savers.”
Should investors be concerned about the tough times for emerging markets over the last year or so?
“Emerging markets, in relative terms at least, have had a difficult time for the last three years versus developed markets. There are good reasons for this, partly due to external factors as China has started to move away from its old economic model led by infrastructure spending, which has affected commodity exporters particularly in China, and also because they have not reformed their economies as much as they needed to.
“That said, the relative period of underperformance is now quite long – the slump in the 1990s lasted about 50 months, so the chances are that we are closer to the end of the cycle than not. At the same time, there are pockets of value to be had and countries that will both benefit from the external situation – we are positive on growth in developed markets – such as Korea, and Mexico which has undertaken some necessary reforms all ready.”
When investing an ISA into emerging markets funds, should savers consider investing in individual countries, rather than wider global emerging markets?
“Potentially, yes you could, but this does carry a lot of risk. Because many country indices are quite concentrated, investing in countries can carry quite a lot of stock specific risk.
“Take Korea for example, we may like Korea from a ‘top-down’ perspective, but almost 20% of its index is made up of Samsung stock. So if Samsung – one stock – doesn’t do well, that can over-ride positive views on the country as a whole.
“GEM stocks are pretty volatile as well, so my view is that for most savers it’s probably best to diversify, and give your managers the widest universe possible to choose stocks from. Having broad GEM exposure will be the best way to go for many savers – and I think this is going to be a great environment for active managers in the coming years.”
Which funds? Ayesha highlights three emerging markets funds from Fidelity’s Select List, which features 140 funds, hand-picked by Fidelity’s investment professionals.
Threadneedle Global Emerging Markets
This is primarily a stock-picking fund, although consideration is given to wider economic developments across regions. Company meetings are a key component of the investment process, and the team meet about 500 companies each year. Ideas are also generated by consideration of global themes (identified by interacting with Threadneedle’s wider global team) which may be applicable to emerging markets.
JP Morgan Emerging Markets
While based in London, this fund draws upon JP Morgan’s considerable emerging markets resources, based in nine main centres around the world. The fund is run primarily on a stock-picking basis, and is looking to invest for the longer term. It tends to have a bias towards growth stocks, and while it can invest across the board, it will tend to hold larger sized companies in the portfolio.
Fidelity Emerging Markets fund
Fidelity’s Global Emerging Markets fund invests in developing countries across the globe, taking advantage of high levels of economic growth across Latin America, South East Asia, Eastern Europe (including Russia) and the Middle East. The aim of the strategy is to give investors long-term capital growth from a diversified and actively managed portfolio of securities that offer material exposure to (and derive a significant proportion of their earnings from) the developing economies of the world.