Emerging market funds falter in 2021; should you continue to invest?


Most equity funds dedicated to investing in emerging markets have fared poorly in 2021. On average, these funds have given negative returns in the current year. There are four major emerging market schemes in the market.

Major emerging market funds such as Edelweiss Emerging Markets Opportunities Equity Offshore Fund, HSBC Global Emerging Markets Fund and PGIM India Emerging Markets Equity Fund have given negative returns between 1 to 4 per cent year-to-date (YTD). One fund Kotak Global Emerging Market (Direct Plan) has offered a return of 0.73 per cent YTD.

The benchmark MSCI Emerging Markets index is down more than 6% year-to-date, against an 18.31% gain during the calendar year 2020.

The poor show of emerging market equities is reflected in the performance of emerging market funds. However, many of them have been able to beat their benchmark index- MSCI Emerging Markets.

EM Funds

The basket of emerging market equities failed to perform mainly because of the poor show of China equities. Other markets like Brazil and South Korea also remained dull this year which dragged the emerging market index down.

“The poor performance can largely be attributed to China, which has greater weightage in the index. China has underperformed due to unprecedented regulatory action. Brazil and South Korean markets too were under pressure,” said Mahavir Kaswa, VP, Reasearch – Passive funds, Motilal Oswal AMC.

“While Emerging markets as a bunch have not performed well, there have been some bright spots. India and Taiwan both form a major part of the index, have posted very strong performance. Similarly, emerging market countries from the Middle East have done well,” Kaswa added.

With top global central banks looking worried over inflation and gearing up for hiking rates, the days ahead for emerging liquidity do not look bright.

Fund advisors underscore that rising inflation, excess liquidity and a strong economic recovery make a strong case for accelerated tapering and eventual rate liftoff in the US.

“The anticipation of tighter monetary policy may present a headwind to emerging markets,” Kaswa said.

Last week, the Bank of England raised borrowing rates, becoming the first major central bank of the world moving towards rates normalisation since the coronavirus pandemic hit the world.

The US Federal Reserve has started cutting the pace of asset purchases and has signalled that policy rates will be raised in 2022. Such moves may trigger capital outflow from emerging markets.

“There will be some fund outflows towards developed economies in case other central banks follow Bank of England’s way of hardening interest rates,” said Ruchit Jain, Lead – Research, 5paisa.com.

But wealth advisors point out that the emerging markets may have factored in the risk of rate hikes and barring some outflow, a major knee–jerk reaction is unlikely.

“During the last rate hike cycle by US (2013), the emerging markets felt the pain as their external accounts were weak and largely dependent on short term capital inflows. While this time around emerging markets has grown relatively resilient. Except for a few, most emerging market countries have good external accounts. Also, the rate hikes have been largely factored in by the market,” said Kaswa.

Kaswa strongly recommends exposure to global markets that include developed markets and emerging markets as they help diversify an investor’s portfolio.

“International equities, historically, have had lower correlation which leads to good diversification. Emerging markets have been shown to improve portfolio long term returns but with higher risk. To reduce country-specific risk, it is recommended for investors to take a basket approach while investing in emerging markets,” he said.

Wealth advisors are not giving up on emerging markets as the influx of new and young investors, rising middle class and increasing digitization signal emerging markets may drive global economic growth in the near future.

Overall, the outlook of equities is bright and emerging markets are expected to stage a comeback in the coming year.

“There is genuine growth uptrend in the emerging markets helped by pent-up demand, increased government spending and recovery in corporate earnings. All these factors are likely to support markets. Also, the ongoing sharp correction will provide an opportunity for fresh entry points. For investors the advice is to do systematic investment to protect their portfolios in case of extreme volatilities,” said Jain.



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