The point we continually repeat is that emerging markets are not homogenous – they can differ markedly in terms of government debt, current account balance, economic drivers and business cycles. As a result we should not expect them to behave the same way. Each has individual characteristics and to treat them as a homogenous entity results in missed opportunities.
Which brings us to Hong Kong. It is not an emerging market, but most of the MSCI China constituents – which makes up 22% of the MSCI Emerging Market index – are listed there. The Chinese government’s decision to open the Hong Kong-Shanghai stock market connection to mainland mutual funds has seen a tide of southbound capital surge into the Hong Kong market.
This is clearly an idiosyncratic event. But if we extend our time horizon, the point holds true. Over the past six months there has been dispersion in returns from emerging market countries. The MSCI China index has returned just over 50%, MSCI Korea almost 22% and MSCI Russia 7%. The MSCI Brazil index has lost just over 13%.
This dispersion is driven by the individual circumstances each market faces. There are some such as Indonesia and Brazil which will face stiff headwinds from the unwinding carry trade – their combination of current account deficits and commodity-based economies renders them particularly vulnerable.
There are others, such as China and Korea, which have current account surpluses and are commodity importers. They clearly do not share this sensitivity and, if anything, should benefit from the improvement in US economic growth implied by the expectation of higher rates.
The dispersion in returns between emerging markets is vast and, in our view, demands an active approach to investing in the asset class. You need to identify which countries are going to do well in a given environment – and which are not. In our emerging market portfolio, we take strong country views and typically own less than half the countries in the index at any given point.