Emerging markets continued last year’s trend in Q1 2024. And that is not good news for emerging market investors, as it meant another significant underperformance versus developed countries. Although the return of the MSCI EM index was 4.71 per cent in euros, making it positive in absolute terms, it is a considerably worse result than the 11.37 per cent achieved by the MSCI World index.
Investors will be discouraged by now, because investing in emerging countries has certainly not guaranteed great returns in recent years. On the contrary, over the past five years, the gap with developed countries is in fact almost 10 percentage points per year.
A major explanation for these underperformance is the disappointing performance of Chinese equities. The country accounts for a quarter of the MSCI EM index as of end-March 2024, making it an index heavyweight. Measured by the MSCI China index, Chinese equities outperformed Western equity markets by an average of 18.55 percentage points a year over the past five years. The reasons are now well enough known.
China not the only drag
Among other things, the bursting of the property bubble and persistently disappointing consumer spending, partly due to the corona pandemic and its aftermath, have weighed heavily on the Chinese economy and local stock market performance. The government has taken measures, including share buybacks, restrictions on stock shortselling and an increase in government spending, especially at the local level, but these have not helped as yet.
Additionally, Brazil and South Korea have also faced challenges, with both countries’ markets underperforming in the early months of 2024. Over a five-year period, their annual underperformance has been significant, highlighting the volatility and risk inherent in emerging market investments.
However, it’s not all gloom. India has shown resilience, aligning closely with the performance of the MSCI World index over a longer period. Taiwan, driven by its robust technology sector—particularly the standout performance of the Taiwan Semiconductor Manufacturing Company—has managed to outshine Western markets over five years.
GQG Partners Emerging Markets Equity fund
Morningstar’s radar, keen on identifying funds with a strong management team and a solid investment process, has spotlighted the GQG Partners Emerging Markets Equity fund. With top ratings in both the People Pillar and the Process Pillar, it has earned a Morningstar Medalist Rating of Gold.
The man behind this success is lead manager Rajiv Jain. Under his stewardship, the fund has not only outperformed the MSCI EM index but also shown commendable performance in comparison to the broader MSCI World index, placing it in the top percentile of its category.
Jain gained fame within the quality growth boutique of Vontobel Asset Management, where, among other achievements, he successfully managed the emerging countries strategy. In 2016, he left Vontobel to set up his own company, GQG Partners. Since then, he has built a team of approximately 20 portfolio managers and analysts. Initially, by recruiting experienced investors, but in recent years, he has chosen to also add more junior members to the team. Jain has been the lead manager of this fund since its inception, but since September 2019, he has been assisted by Sudarshan Murthy, and in mid-2022, Brian Kersmanc and James Anders joined him. All three were analysts within the team before being promoted to portfolio managers. Anders left the firm at the end of 2022.
Quality growth strategy
Jain applies to this fund the same strategy he has used since the late 1990s, best described as quality growth. He looks for sustainably growing companies with solid financial foundations that have proven they can withstand tougher economic times. Specifically, this means he predominantly selects large caps that achieve a high return on equity and have a balance sheet with low to moderate leverage. He applies this approach with boldness, and country and sector allocations may significantly differ from the benchmark. Although he normally takes a long-term view, he can also abruptly change his positioning when he deems it appropriate.
This was the case, for instance, between early 2021 and late 2022, when he heavily invested in energy stocks and significantly reduced his exposure to the technology sector. However, in 2023, Jain timely returned to the technology sector with new positions in Broadcom and NVIDIA, among others. The latter stock, in particular, significantly contributed to the strong performance of the fund last year and again in 2024. Additionally, PetroChina, Zijin Mining Group, and Adani Ports & Special Economic Zone were among the best-performing stocks in the first quarter of 2024.
Ronald van Genderen is a senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds on the basis of quantitative and qualitative research. Morningstar, one of Investment Officer’s knowledge partners, each Friday highlights the performance of a specific fund in a specific sector in the Morningstar Fund Radar article.