Sector shows an increase over the year to date
After a rocky few years, the Global Emerging Markets sector has picked up in 2016, with the sector showing an increase of 31% over the year to date at the end of August.
This makes it the second top-performing Association of Investment Companies (AIC) sector over the year to date. Yet whilst the Global Emerging Markets sector has outperformed the wider industry average by 23 percentage points over ten years, it has underperformed by 52 percentage points over five years.
Improving investor confidence
With the value of sterling falling after the Brexit result back in June, those who were invested in emerging markets received a boost. Over the past few months, emerging markets have continued to outperform developed markets as investor confidence has improved. Fund flows have remained robust, leading year-to-date flows to turn positive. That said, investors generally have a much lower weighting to this asset class in their portfolios.
With emerging market equities having risen by almost 30% so far this year – albeit with sterling weakness flattering returns to some extent – the obvious question is whether or not the rally can continue.
Broad economic performance
There are reasons to remain optimistic. Firstly, broad economic performance is showing signs of improvement across the emerging world and appears to be contributing to the first positive earning surprises we have seen in a number of our markets for several years.
The case is supported by equity market valuations that remain quite reasonable, particularly so when compared with developed markets. The same is true of emerging market currencies, which proved to be a significant headwind for much of this decade, but have stabilised and in many cases are slowly recovering from undervalued levels.
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Performance data is share price total return to 31 August 2016 based on the last official close price at the month end, on a total return basis. No expenses taken into account. Source: AIC using Morningstar.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.