After underperforming in the first quarter, the emerging markets index outperformed the MSCI World in the second quarter. This was entirely due to China, which ended the second quarter positively, while almost all other equity markets suffered significant losses.
Global equity markets experienced a particularly bad second quarter. Geopolitical tensions, recession fears, rising inflation and interest rate hikes by central banks gave investors the necessary headache. The MSCI World index fell by 10.80 percent in the period from April to the end of June, resulting in a loss of 13.53 percent for the first six months.
Although emerging markets still underperformed the global equity index in the first quarter, they experienced a strong second quarter. Although there was a loss with a return of -5.76 percent, this was considerably less than for developed countries. As a result, a loss of 10.40 percent remained for the first half of the year.
The relatively strong performance of emerging countries is remarkable because the markets in a large number of countries have not been in a good state with investors in recent months. This was particularly the case in South America, where the stock exchanges of Argentina, Brazil, Colombia and Peru recorded losses ranging from 19.54 percent to 25.75 percent when measured in euro. A combination of rising concerns about a global recession, uncertainty about domestic policies in several countries and weaker industrial metal prices later in the quarter contributed to declines in equities and currencies in the region.
Poland, Hungary worst performers
Meanwhile, the ongoing war in Ukraine was a key reason for the weak performance of stock markets in Poland and Hungary, which were among the worst performing markets globally with losses of around 22 percent for both countries.
In Asia, countries such as South Korea and Taiwan were among the weaker performers. In Korea, it was stocks in the energy, financials and technology sectors that were hit particularly hard by fears of a global recession. The same was true in Taiwan, where companies also suffered from global supply chain problems that weakened demand for its technology products.
In the end, it was only China that ended the quarter in positive territory, with the MSCI China index up 10.06 percent and the MSCI China A Onshore index up 8.08 percent. Eased lockdown measures and better-than-expected factory activity in the country in June boosted positive investor sentiment here. Meanwhile, additional economic support measures were announced. As a result, the outperformance of the emerging markets index in the second quarter was entirely attributable to China.
Nordea 1 - Stable Emerging Markets Equity
This week’s Top 5 lists the five best performing funds, as measured by the distribution fee-free share class available in the Netherlands, in the Morningstar Emerging Markets Equity category based on their performance over the first six months of 2022.
Leader is Nordea 1 - Stable Emerging Markets Equity, which has been managed by Claus Vorm and Robert Næss since its launch in 2011. They are both part of Nordea’s multi-asset team that is responsible, among other things, for managing the stable equity funds range. Claus Vorm (pictured) is the equity expert within this team.
The strategy is based on investing in equities with a lower volatility profile, which should offer protection against price falls. This preference is combined with a focus on quality stocks with attractive valuations. Over the first quarter, several South American stocks were still among the best performers, but in the second quarter the good performance of Chinese stocks has changed that picture.
With a 42 percent weighting in Chinese equities, the portfolio is well overweight in the region, compared to a 32 percent weighting in the MSCI EM index. Among the ten stocks with the highest returns in the portfolio this year, seven are Chinese, and among these we find China Overseas Land & Investment, China Resources Sanjiu Medical & Pharmaceutical and MingYang Smart Energy Group. Incidentally, the other three well-performing stocks are strikingly Brazilian: CPFL Energia, ENGIE Brasil Energia and Companhia De Saneamento Basico Do Estado De Sao Paulo.
ABN Amro fund in second place
AAF-M&G Emerging Market Equities is one step down. This is an ABN AMRO fund, but is managed by M&G and is largely a copy of M&G (Lux) Global Emerging Markets, which is fourth in this ranking. Michael Bourke has been at the helm since October 2018 and is supported by four analysts, but this team has seen some turnover in its composition in recent years.
When Bourke took charge of this strategy, he maintained the fundamental bottom-up approach characterised by strict valuation discipline. The end result is a fairly diversified portfolio of around 70 positions. China is underweight by around 10 percentage points and the relatively good performance this year is therefore mainly due to strong stock selection. Top picks this year include Kosmos Energy, Centrais Eletricas Brasileiras and CNOOC.
Top 5 EM stocks
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.