1. Newsroom
  2. Emerging-market equities: country diversification the priority
Menu
UBP in the press 05.12.2017

Emerging-market equities: country diversification the priority

Emerging-market equities: country diversification the priority

L'Agefi (16.11.2017) - Emerging-market equities have started to make up lost ground, but still have a way to go. Geographical diversification remains crucial when investing in this asset class.


Emerging equities have had a rough ride in the last few years, but are now back on the radar for international investors. Their recovery started in January 2016, although they have so far reversed only a small proportion of their previous underperformance. Valuations are not excessive, even though between the start of the year and 22 September the MSCI EM (emerging markets) index rose 30%, double the gain achieved by the MSCI World index over the same period.

Within the emerging equities asset class, large-caps have outperformed small- and mid-caps.

The same phenomenon has been seen in the US market, where there have been exceptional gains for the FANG stocks, i.e. Facebook, Amazon, Netflix and Google. Although leading mega-cap stocks in emerging markets lack any similar acronym, five companies stand out: Chinese internet and mobile service specialist Tencent, Korea’s Samsung Electronics, China’s Alibaba, Taiwanese semiconductor producer TSMC and South African media group Naspers. The gain achieved by these five stocks this year has been double the historical average of emerging-market mega-caps. This shows that the situation in the US market, where returns have been concentrated among a handful of major tech stocks, also exists in emerging markets, where certain blue chips have benefited from excellent performances in the internet and semiconductor sectors this year.

Value stocks: extremely low multiples

China’s dominant weighting in the MSCI EM index calls for particular caution. Although foreign-listed Chinese stocks have pushed the index higher, domestic Chinese companies have underperformed it. The recent decision to include A shares (denominated in yuan and mainly reserved for Chinese residents until recently) is likely to destabilise the MSCI EM index. Although the timetable for including A shares remains vague, investors must bear in mind this upcoming change to the index over the next few years. In addition, Chinese equities have been boosted by fiscal stimulus, which will be less and less beneficial from now on, and the Chinese government has started to tighten its grip on credit. As a result, investors must increase their country diversification in order to manage risk more effectively.

We still prefer the value investing style over the long term. Recent weak performance by value stocks means that their relative valuations are now extremely low in emerging markets, similar to levels seen in 2001 and 2008. Rising interest rates and the correction among tech stocks could trigger a recovery. Aside from value stocks, there are other attractive market segments: investors could also increase exposure to mid-caps, ASEAN countries, Russia and certain commodity producers that have lagged behind in the recent rally.

More about Emerging Equities

NEGRE Mathieu_p-1.jpg

Mathieu Nègre
CFA, Head of Global Emerging Equities

Expertise

Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

Le news più lette

UBP in the press 13.02.2020

Are all batteries created equal?

Environmental finance (02.2020) - Electric vehicles (EVs) have an important contribution to make towards a zero-carbon future and therefore are suitable for inclusion in a positive impact investment strategy.

UBP in the press 17.04.2020

Smug Money podcast: Is impact investing the answer?

Good With Money (25.03.2020) – Our Co-Manager of the Positive Impact Equity strategy Rupert Welchman discusses the importance of impact investing in the current environment.

UBP in the press 03.03.2020

Discretionary management expertise moves centre-stage

Le Temps (02.03.2020) - Institutional and discretionary asset managers are increasingly using the same decision-making tools and investment techniques.

Altro da leggere

UBP in the press 13.08.2020

Spreads: contained for virus, tightening for yields

Institutional Money (07.08.2020) - Since the height of the Covid-19 crisis in March 2020, risk assets have seen a significant rebound, with credit spreads reverting to more normalised, albeit still elevated, levels.

UBP in the press 06.08.2020

A pure-play private bank with a long heritage - the UBP way

WealthBriefingAsia (03.08.2020) - Ranjit Khanna, Head of South Asia and Singapore Branch Chief Executive, Union Bancaire Privée, talks to WealthBriefingAsia. The bank won Best Boutique Private Bank (Southeast Asia).

UBP in the press 03.08.2020

The dawn of the hedge fund era

Le Temps (03.08.2020) - In the past ten years, hedge funds have struggled to offer any kind of satisfactory returns, constrained by persistently weak interest rates and a lack of volatility.