“As industries consolidate, companies with strongbalance sheetsand capabilities will benefit fromthese structural drivers,”headds, pointing to the long-termstructuralthemes of5G, digitalisation, the internet of things, risingfinancial penetration, healthcare, premiumisation andinfrastructure. “Overall,weviewthe current

environmentnot as a threat, but as an opportunity to increase our exposure to excellent-quality companies that arenowavailable at discounted pricesandweare selectively addinga fewvaluenameswherewefeel that the companies are trading substantially below their intrinsic values,” saysMrGala.

SPREADINGTHEGROWTH Insome respects, a healthier Chinese economy is clearly positive for emergingmarkets, says AlexWolf, head of investment strategy for Asia at JPMorgan PrivateBank, but it dependsonthe compositionof that growth. China has rebounded very quickly, predominantlydue to strong exports, as their factorieswere open whenmany across the globewere not,while the country is theworld’s largest producer of both personal protective equipment andelectronic devices—both ofwhichhave been in highdemandduring this period. “Thismeanstheir growth is

currently less complementary to otheremergingmarkets than in the past,” he explains. China generally boosts other emergingmarkets through commodityimports—in the pastwhen constructionwas booming, oil, ironore,andcopper importswould lift commodity producers. “However at themomentit’s less

of a boost and, going forwardas China transitionsaway from investment towardsdomestic


China’s rebound leaves clear leader

Emerging markets slightly underperformed developed markets in 2020. For the year-to-date to September 30, the MSCI EM index has returned 1.3 per cent in GBP terms, while the MSCI World index for developed country stocks has returned 3.9 per cent. That said, similar to most global

markets, there has been wide divergence in terms of investment styles. The emerging markets growth stocks, represented by theMSCIEM Growth index, returned 15.2 per cent year-to-date compared to a loss of 12.1 per cent for the emerging markets value stocks, represented by theMSCI EMValue index. Performance has been driven by a

handful of momentum growth stocks, namely Alibaba, Tencent and TSMC, each returning more than 40 per cent over this period. The fact that these stocks collectively make up 20 per cent of theMSCIEMindex has exacerbated their effect on the market. At the country level, China,which

led the initial sell off, has been a clear winner compared to other emerging markets, with theMSCI China index returning 19.3 per cent. Chinese equities outperformance has been drivenby the country’s ability to control the coronavirus spreadmuchbetter than some other economies,whichhas enabled an early economic rebound, while its status as a non-oil-exporting nation has helped aswell. Among theworst-hit emerging

markets has been Brazil, with theMSCI

Brazil index losing almost 40 per cent. The driver of marketweakness has been macroeconomic vulnerability, exacerbated by the impact of Covid-19. As expected, the growth-oriented

emerging markets strategies have outperformed the value-leaning ones. JPM Emerging Markets has been a standout performer. The strategy is led by Leon Eidelman with the quality growth approach, seeking to invest in companies that boast quality franchises, consistent earnings streams and solid returns on equity. Following strong relative performance and steady inflows, the strategy soft-closed in May 2020. Another leader has been Fidelity

Emerging Markets. The strategy benefits froma seasoned lead manager Nick Price, who has successfully managed this strategy since 2009, and is meant to provide exposure to Fidelity’s best emerging markets equity ideas. The manager primarily looks for quality growth firms that exhibit strong and sustainable returns on equity, good balance sheets and shareholder-friendly management teams. Conversely,Comgest Growth

Emerging Markets has struggled year-to-date. While the strategy also favours quality growth stocks, it is rather price-conscious and as such has avoided Chinese internet giants Alibaba and Tencent,which has hurt its relative performance. In addition, the portfolio has also remained invested in companies that can benefit from long-termdomestic growth despite strong macroeconomic headwinds, for example in Brazil and South Africa.

Lena Tsymbaluk, senior analyst, manager research,Morningstar

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