Last year was another disappointing year for emerging market investors. The MSCI EM index yielded more than the MSCI World index, although the underperformance was less dramatic than in 2021. A summary of key events and a ranking of the five best-performing funds.
2022 will go down in the books as a lean year for emerging markets. Not only did the MSCI EM index post a negative return of almost 15 per cent, this loss was even greater than the -12.78 per cent for the MSCI World index. While not as dramatic as the sharp underperformance of more than 26 percentage points in 2021, few emerging market investors will look back on the past year with a sense of satisfaction.
As such, it was an eventful year in which developments followed in rapid succession. Investors started the year with concerns about the global economy. Inflation and, as a result, expectations that central banks worldwide would tighten monetary policy, led to risk aversion among investors.
Eastern Europe
These concerns were amplified after Russia invaded neighbouring Ukraine in the early morning of 24 February. It caused a shockwave in financial markets. The economic impact of the war on the European continent not only caused geopolitical turmoil, but made itself felt especially in the adverse economic effects of the ensuing energy crisis. Central banks responded with yet more interest rate hikes to halt soaring inflation. Rising interest rates led investors to sell off especially highly valued growth stocks. Value stocks, including especially those in the energy sector, held up relatively well.
East European stock markets were hit hardest by the war. Despite a remarkably strong recovery in the fourth quarter of the year, Hungary and Poland were among the biggest losers in 2022 with returns of -26.56 per cent and -22.48 per cent, respectively. Russian stocks were removed from the MSCI EM index after the invasion. Whereas the Eastern Europe region still accounted for 5 per cent within the emerging-market index as of end-December 2021, it fell to just 1.66 per cent as of end-December 2022.
China
Another big loser was China. The country, which weighs heavily in the MSCI EM index, faced a property market malaise and was weighed down by the ongoing corona pandemic. For a long time, the Chinese government maintained a zero-Covid policy that included strict lockdowns. These increasingly led to social unrest as the year progressed, eventually leading to an abrupt decision in the fourth quarter for a general, uncontrolled reopening. Investors reacted positively to this, resulting in a rebound among Chinese equities, despite the fact that Covid-19 continued to surround it.
Meanwhile, tensions between China and Taiwan escalated with recurring military displays. Taiwan, which is considered a renegade province by China, saw the value of its stock market fall by almost 26 per cent, ending in the bottom of the countries› stock market performance.
South America
Finally, the good performance of Latin American countries stood out. Brazil (21.63 per cent), Chile (27.18 per cent), Mexico (4.40 per cent) and Peru (16.61 per cent) all achieved positive returns. Brazil, the leading country within the MSCI EM index of these four, saw a particularly strong first quarter and a good third quarter. However, the fourth quarter ended disappointingly in a loss after former president Luiz Inácio Lula da Silva beat incumbent president Jair Bolsonaro by a minuscule margin in the presidential election.
This week’s top five lists the five best-performing funds (of which a distribution fee-free share class is available in the Netherlands) in the Morningstar Emerging Markets Equity category based on their 2022 performance.
Top five
Leading the rankings by a wide margin is BSF Emerging Markets Equity Strategies Fund, owned by experienced duo Sam Vecht and Gordon Fraser. They take a long/short approach, also using derivatives. In the just over 70-position portfolio, this is reflected in the ten largest positions. On the long side, we see relatively large positions in Samsung Electronics, Alibaba and Baidu, while on the short side, positions are present in Weg, Fortescue Metals and LVMH.
This also makes it immediately clear that the fund does not necessarily invest in companies from emerging markets themselves, but also in Western companies with significant exposure to these countries. The fund had a formidable final sprint with a return of just over 11 per cent over the last three months of 2022, leading to the headline position for the full year.
BlackRock’s fund is followed at a suitable distance by number two Nordea 1 - Stable Emerging Markets Equity. At the helm of this fund are Claus Vorm and Robert Næss and they have been doing so since the fund’s launch in 2011. Both managers are part of Nordea’s multi asset team which, among other things, is responsible for managing the stable equity fund range.
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 an attractive valuation. The latter criterion is strictly applied and predominantly gives the portfolio a value character according to the Morningstar Style Box. The fund’s good performance in 2022 was mainly driven by positions in companies from Latin America, including Companhia De Saneamento Basico Do Estado De Sao Paulo, CPFL Energia and Aguas Andinas. However, the best-performing stock was Turkey’s Bim Birlesik Magazalar.
Ronald van Genderen is senior manager research analyst at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.