2021 was one of the worst calendar years for emerging markets in the last decade, according to senior manager research analyst Ronald van Genderen of Morningstar, in his contribution for this week. Only 2013 saw a (narrowly) bigger loss. That year, the market was hit by concerns about the so-called “taper tantrum”. The situation today is similar, with increasing concerns about rising inflation that may trigger interest rate actions by Western central banks.
The year 2021 was not favourable for emerging countries. Although the MSCI Emerging Markets index achieved a positive return of 4.86 per cent, this was considerably less than the 31.07 per cent gain recorded by the MSCI World index. This was the sixth time in ten years that shares from emerging countries had underperformed those of developed countries. Rarely has the underperformance been so great; only in 2013 was the gap even wider.
Throughout the year, emerging markets lagged behind. In the first and second quarter, the underperformance was 2.74 percent and 2.67 percent respectively. However, the greatest damage was done in the second half of the year. The third quarter saw an underperformance of 8.27 per cent and 2021 closed with an underperformance of 9.25 per cent over the last three months of the year.
Global economic situation
Investors are increasingly worried about the state of the global economy and this could have major implications for emerging markets. Rising inflation, driven mainly by high energy prices, is feared to prompt Western central banks to raise interest rates. Thoughts also immediately go back to the “taper tantrum” of 2013, when the US central bank’s decision to reduce its economic support measures led to a sharp sell-off of emerging market equities and bonds.
High energy prices and interest rates will take their toll and reduce economic growth. Although it remains to be seen if and when Western central banks will act, central banks in several emerging countries have already taken steps in the past year. The Brazilian stock market, for instance, fell more than 11 per cent, partly due to a very weak third quarter, after inflation continued to rise above the central bank’s target, which was met with interest rate hikes. This made it the third worst performing market globally in 2021.
The biggest annual loss was in Turkey, where Erdogan allowed inflation to spiral out of control in his country by preventing the central bank from raising interest rates. The result was a dramatic fall in the exchange rate of the Turkish Lira against the euro. The nice return on Turkish shares in local currency was hereby transformed into a loss of almost 23% measured in euros.
China
China should also be mentioned here. The country had a turbulent year, which ended with a loss of almost 16%. The reasons behind the large annual loss are diverse. New regulations were introduced that hit the technology sector hard, including tech giants like Alibaba and Tencent. In addition, new Covid-19 restrictions were regularly imposed (locally), political tension over Taiwan increased and there was a property crisis with a leading role for Evergrande.
This week’s Top 5 provides an overview of the five best-performing funds in the Morningstar Emerging Markets Equity category based on their performance over 2021.
Schroder ISF Emerging Markets Value closed 2021 in the top spot, having already held that position at the end of the second and third quarters. Although the fund was only launched in September 2020, it had an excellent first calendar year, analysts Ronald van Genderen of Morningstar. The management duo Juan Torres and Vera German both have experience as analysts, but their experience as managers is considerably more limited. The fund invests in stocks whose price has fallen significantly. This gives the portfolio a value character and this fund benefited from this in the past year. In addition to this style backdrop, it was particularly good stock selection that was responsible for the excellent returns this year. Among the right choices are MTN Group (181%), Coretronic (160%) and Towngas China (112%).