Emerging markets — basket case or opportunity?

Emerging markets — basket case or opportunity?

The US-China trade war has sent last year’s high-performing fund sector into a tailspin

What do you get if you combine a trade war between the US and China with higher US interest rates, a stronger dollar and an economic crisis in Turkey and Argentina? Answer: an emerging markets meltdown that is certainly no joke.

But battered markets also mean lower prices. And some analysts say now is the time to invest, not run for the exit. FT Money looks at the forces roiling emerging markets, the areas worst affected — and those where fund managers think value beckons. What strategy should individual investors adopt to come out on top in this volatile sector?

What a difference a year makes. In 2016 and 2017 emerging markets could do no wrong. Rising commodity prices, a global economic recovery and low interest rates sent money flooding into markets such as China, Taiwan and South Korea.

The MSCI Emerging Markets index, a major benchmark of stocks, gained more than 30 per cent in 2016 and another 25 per cent last year in sterling terms — more than double the return of the S&P 500 that year — peaking at a record high in January 2018. Emerging market currencies surged too: the MSCI Emerging Currency index hit its strongest level on record against the dollar at the start of 2018.

From this point, though, things started to sour. The twin spectres of rising interest rates and a strong dollar in the US led to currency crises in Argentina, Turkey and South Africa and triggered a contagion that rippled through emerging currency and stock markets, leaving investors thinking the bubble might have burst.

“Emerging markets are facing a perfect storm in 2018 with their currencies, stock and bond markets all taking a battering,” says Jason Hollands, managing director at Tilney Group.

In the year to date, the MSCI Emerging Markets index has lost just under 8 per cent and volatility has spiked. Emerging market funds were among the best performing of any last year, but the average Investment Association emerging market fund is now the worst performing of any sector.

In the UK, investors pulled more than £255m from emerging markets funds between June and July 2018, according to the Investment Association. Emerging markets funds experienced net outflows from retail investors in four of the first seven months of the year.

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