- Significant dispersions were noted across regions, countries, sectors and styles.
- Asia was the only region to deliver positive returns over the last one year, all other regions suffered losses.
- Mid/Momentum funds outperformed all other indices over all time horizons. ESG & SRI thematic funds fared much better than other factors and styles.
- Volatility trends across major countries have stabilised since the emergence of COVID 19
- India’s correlation with overall EM market steadily rises, reflecting its importance in the region.
Significant dispersion between top & bottom ranking nations
Exhibit 1 shows the 1-year annualized returns for Emerging Market countries. In the 1-year time period, Asia was the only region to experience positive annualized returns (21.34%) whilst Europe, Middle East and Africa and Latin America delivered losses of -4.65% and -21.74%, respectively. At a country level, Taiwan offered the highest returns to investors of 39.91% followed by South Korea (39.22%), China (19.21%) and India (7.51%). In contrast, Egypt (-32.55%), Colombia (-30.63%) and Brazil (-27.65%) 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 Factors and Style- Momentum has outperformed over all time horizons
Exhibit 2 shows that MSCI EM Large/Mid momentum has outperformed all other indices over short term as well as long term historic basis (15 years). However, ESG and SRI focused indices were only introduced in the last 7-10 years but have done extremely well since then.
MSCI EM SRI ranked 2nd over the 1-year period and was 3rd over the last 3-,5- and 7-year period. MSCI EM ESG Leaders ranked 2nd over a 10-year period and 4th over 3-, 5- and 7- year periods. This shows that traditional factor-oriented fund leadership was being replaced by ESG and SRI funds which offer risk-rewards over the long term. Moreover, Large/Mid Value has been a constant underperformer whereas EM Large/Mid Growth generated a return of 22.18% in 2020 and has been ranked 2nd in in 3-, 5- and 7- year period. 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: Momentum has been the best performing factor across Emerging markets over the past 15 years
Sector performance shows IT, Materials and Health Care outperformed with government support
Exhibit 3 shows returns for primary sectors in EM over various time periods. Over the one-year period, Information technology (50.98%), Materials (28.11%), Consumer Discretionary (26.92%), Healthcare (25.85%) and Consumer Services (23.70%) provided high positive returns for the investors. Information technology has outperformed all other sectors across all time horizons. Government stimulus efforts and spending on infrastructure and health care has supported the high returns made by the materials and healthcare sector. Cyclical sectors like Energy stocks (-10.65%) have suffered from the decline in demand for oil while Financials (-12.67%) have been hit by the low interest rates. Given the lockdown and economic slowdown caused by COVID-19, consumer discretionary performed surprisingly well with a return of 26.92%.
Exhibit 3: Sector performance shows IT, Materials and Health care outperform with the government support
Volatility trends stabilize across EM since the emergence of COVID 19
The 12-month rolling volatility of BRIC countries (Brazil, Russia, India and China) as well as EM as a whole are shown in Exhibit 4. EM volatility is considerably less since GFC but it is still stagnant at what it was during the emergence of COVID-19 pandemic at 14.70%.
The 12-year rolling volatility for China is at 12.47% which is lower than the overall emerging market whereas the rolling volatility for Brazil, India and Russia are all above the overall emerging market. Volatility for Brazil is currently the highest of the four BRIC countries and has reached its GFC levels at 46.58%. The volatility for Russia started decreasing in the first quarter of 2021 whereas the volatility for India has been increasing at a declining rate indicating a relatively stable economy as countries are recovering from the pandemic and as the vaccines are being rolled out.
Exhibit 4: 12 month rolling volatility is stabilising since first half of 2020
Increasing importance of India in EM is shown through rising correlation with MSCI EM
The 36-month rolling correlation of BRIC countries to the overall MSCI EM Index is shown in Exhibit 5. Correlation of Chinese equity to the EM market has been steady at around 80% and its historical range has very low dispersion. This is not a surprise because China makes up more than 30% of the EM equity market and hence has a consistently high correlation.
Correlation of China and India has increased significantly over the years. A notable trend is that India’s correlation has been steadily increasing since 2015 and is currently at 62% whereas China’s correlation started decreasing in 2020 which is an indication of India’s growing importance within the region.
Overall, country level correlation dispersion outside the BRICS still exists which means investors with well diversified exposures across broader emerging markets can benefit from country level diversification.
Exhibit 5: Rolling correlation trends show growing importance of Indian equity market
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