The tailwinds supporting Emerging Markets (EMs) in early 2018 improved economic resilience and corporate productivity, rising commodity prices and a benign US Dollar have given way to headwinds as trade disputes, high inflation, spiralling currencies and declining growth rates have led EM stocks into bear territory. It is rough out there, but EMs are broader and better than the crisis stricken economies that have dominated news flow, and we believe that many companies will progress despite the changing winds.
Looking beyond the troubled three (Turkey, Argentina, South Africa), macroeconomics in EMs are in relatively good health. Purchasing Manager Indices for all countries except Malaysia, Turkey, Korea and Russia are higher than 50, indicating economic expansion. We see reasonable growth and low interest rates and sensible economic policies in the majority of countries comprising the EM benchmark. This underpins a business environment for EM companies that are more robust than what the headlines portray. They are well positioned to take advantage of this. Expected free cash flow yields are on the rise, and forecast earnings per share across EMs are stronger than those for the US.
To us, the highs and lows of 2018 have reaffirmed one of our key convictions: that EMs are not a destination for short-term trades but for long-term investment in high quality, sustainable companies. Macro forces from US Dollar strength to commodity cycles, political fallout or economic mismanagement will inevitably buffet the universe, advancing or impeding stock prices. However, as the year to date has shown, they are ephemeral in comparison to the corporate fundamentals identified by stock analysis. Like ourselves, the companies we invest in aim to adapt to the current turbulence, act with discipline and capture long-term growth opportunities. We know, as they do, that these skills are hardearned and often require operating in adverse environments such as the current market. And that the insights gained from these experiences are valuable, capable of contributing to the positive, compounding returns throughout cycles that we have generated since inception and continue to seek however strong the tailwinds or headwinds become.
Performance stated is the total fund return and may differ from the individual share class performance. For individual share class performance see the relevant factsheet.
F GBP Accumulating Factsheet