In this research article we assess the key drivers of Global emerging market equities. We note that significant fundamental dispersion (valuation) created by the 2020 pandemic has led to significant 12 month return dispersions across regions, countries, sectors and styles. The Asian markets experienced the highest returns over the 1-year time period compared to EMEA and LATAM regions. In addition, SRI, Momentum and Mid caps outperformed other style over the 12-month period as investors rotated from covid-safe sectors to covid-sensitive segments of the market. It was not a surprise to see normalization of volatility trends across major countries as governments and central banks defended covid-19 shock with unprecedented fiscal and monetary policy response.|
Significant dispersion between top & bottom ranking nations
Exhibit 1 shows the calendar year returns for Emerging Market countries. In the past year, Asia experienced highest positive returns (30.8%) followed by Latin America (27.37%), Europe, Middle East and Africa (22.8%), respectively. At a country level, Taiwan offered the highest returns to investors of 58.51%, subsequently South Korea (51.96%), India (44.2%) and South Africa (43.73%), notwithstanding varying success in fighting Covid-19 headwinds. In contrast, Egypt (-22.41%), Turkey (-16.84%) and Malaysia (-4.92%) were the three worst performers. There was a significant amount of dispersion between the top and bottom ranking countries.
Exhibit 1: Asia is the only region to experience positive returns
EM by Factor & Style – Socially Responsible Investing (SRI) outperformed Momentum over the past year
Exhibit 2 shows that MSCI EM Large/Mid momentum has outperformed all other indices over medium to long term historic basis (15 years). However, over the past year Socially Responsible Investing has proved to outperform momentum by approximately 10%. ESG and SRI focused indices were only introduced in the last 7-10 years but have done extremely well since.
MSCI EM SRI ranked 2nd over the last 3-,7- and 10-year period. MSCI EM Growth performed very well over 3-,5- and 7-year time horizons. This shows that traditional factor-oriented fund leadership was being replaced by SRI funds which offer long term sustainable returns. Moreover, Large/Mid Value has been a constant underperformer. The decline in interest rates along with the expectation of the decline in the financial sector earning due to recession have contributed to the value’s underperformance.
Exhibit 2: SRI outperformed Momentum over the past year