Morningstar Top 5 Emerging Markets Stocks: Acadian leads

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For emerging markets, the third quarter of this year was almost the exact mirror image of the second quarter. The MSCI EM index recorded an underperformance compared to the MSCI World index, mainly due to a solid loss for Chinese equities. In Latin America, some markets actually made up for second-quarter losses in the past three months. Meanwhile, the war in Ukraine continues to weigh on Eastern European markets.

The outperformance of emerging versus developed country equities in the second quarter was short-lived, as it remained just that one three-month period. In the third quarter, the MSCI EM index posted a loss of 5.63 per cent, while the MSCI World index just kept its feet dry with a gain of 0.11 per cent.

Developments in emerging markets in the third quarter were almost the mirror image of those in the second quarter. Thereby, China as an index heavyweight again made a significant mark on the direction of the MSCI EM index. In the second quarter, China was the only emerging country to post a positive return, but in the subsequent quarter it was the second worst performer with a minus of over 17 per cent for the MSCI China index. The weak performance was partly driven by concerns about globally rising interest rates, the malaise in the property market, and the increasing spread of Covid-19 across China, leading to fears of further lockdowns as the country continues to pursue a zero Covid policy.

China region also among big losers

Other markets in the region were also among the big losers, including Hong Kong (-11.39 per cent), Korea (-10.79 per cent) and Taiwan (-8.73 per cent). India was one of the few Asian countries that did manage to excel, gaining 13.65 per cent.

Elsewhere, several markets in Latin America partially made up for second-quarter losses. Brazil, with a 15.83 per cent return, was even one of the best-performing markets globally, with investors capitalising on the better-than-expected development of the economy and apparently looking forward to the upcoming presidential election with confidence. Chile also distinguished itself with a 10.11 per cent return.

Meanwhile, the war in Ukraine continues to weigh on Eastern European markets. Poland was the weakest brother with a 20.06 per cent loss over the past three months, after already losing 22.44 per cent in the second quarter. Countries like the Czech Republic (-13.72 per cent) and Hungary (-9.25 per cent) also ran into hefty losses.

Investors are starting to doubt the outlook for emerging markets. While in the first three months of the year over €9 billion still flowed towards emerging market equity funds, in the months that followed, these registered outflows of €4.5 billion. This means the counter for this year is still in the plus, but sentiment has turned.

Top 5

This week’s top five lists the five best-performing funds, as measured through the distribution fee-free share class available in the Netherlands, in the Morningstar Emerging Markets Equity category based on their performance over the first nine months of 2022.

Acadian Emerging Markets Managed Volatility Equity

Acadian Emerging Markets Managed Volatility Equity takes first place on the ranking. The approach aims to lower volatility while maintaining the same return profile as the equity market and does so based on both market mispricing of risk and equity fundamentals. For this fund, that approach results in a highly diversified portfolio with as many as 398 positions. Within that portfolio, TSMC is the largest position with a weight of 3.69 per cent, while Tencent is the second largest position with a weight of 1.68 per cent which further emphasises the portfolio’s risk diversification.

Nordea 1 - Stable Emerging Markets Equity

Runner up is Nordea 1 - Stable Emerging Markets Equity which has been managed by Claus Vorm and Robert Næss since launch in 2011. They are both part of Nordea’s multi asset team whose responsibilities include managing the stable equity fund range. Vorm is the equity expert within this team. The strategy is based on investing in equities with a lower volatility profile, which should provide protection against price declines. This preference is additionally combined with a focus on quality stocks quoted at attractive valuations. Brazil’s good performance is reflected in this portfolio, as three of the four stocks with the highest returns are from that country (CPFL Energia, Companhia De Saneamento Basico Do Estado De Sao Paulo and Bank Bradesco).

Best performing funds (NL fund class):

Best performing funds (BE fund class):

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 is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.