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FSM Fund Choice: Eastspring Investments Global Emerging Markets Fund [November 2017] October 27, 2017
Last year today, we have hand-picked Eastspring Investments Global Emerging Markets Fund as our fund choice (+27.3% over the past 1 year), given the considerable upside potential against a backdrop of stabilizing commodity prices and improving corporate earnings. In this article, we would like to revisit the emerging markets’ stories, and why investors may opt to ride on the emerging tide again via this month’s fund choice - Eastspring Investments Global Emerging Markets Fund.
Author : Tan Wei Yine


FSM Fund Choice: Eastspring Investments Global Emerging Markets Fund [November 2017]

Asian equities have been the biggest winner amongst global stock markets thus far. Standing behind the Asian equities are none other than the emerging markets equities, which have posted stellar performance this year alongside with Asian peers. The MSCI Emerging Market Index has delivered 21.9% return year-to-date (see Figure 1 below).

FIGURE 1: Year-to-date equity markets' return.

Last year today, we have hand-picked Eastspring Investments Global Emerging Markets Fund as our fund choice (+27.3% over the past 1 year), given the considerable upside potential against a backdrop of stabilizing commodity prices and improving corporate earnings. In this article, we would like to revisit the emerging markets’ stories, and why investors may opt to ride on the emerging tide again via this month’s fund choice -Eastspring Investments Global Emerging Markets Fund.

Why emerging markets?

Exports Moving in Tandem with Global Economic Recovery

Against a backdrop of global economic recovery, aggregate demand has been robust across the globe. The robust demand which coincided with the recovery in commodity prices from since 4Q2016 has fueled exports growth for emerging economies into 2017 (see Figure 2).

FIGURE 2: Aggregate exports and PMI figures for emerging economies.

Apart from robust exports growth, an additional supporting evidence would be the manufacturing PMI figures, which is treated as a leading economic indicator for producers of the economy. The PMI figures have been hovering at expansionary level (above 50) since 2H2016. This indicates that producers are in view that global aggregate demand will remain strong in the near-term. Moving forward, as global economies continue to trek the path of recovery, we opine that aggregate demand is likely remain strong, which may underscore the exports growth for emerging economies in quarters ahead.

Stable Commodity Prices and Lesser Dollar Strength

FIGURE 3: BRIC exports as % of GDP.

Emerging countries rely on exports activities as part of their growth engine (see Figure 3). Some of the large emerging nations, like Brazil and Russia, are amongst the largest commodities producer in the world. Given that, emerging economies are sensitive to the movements of the greenback and commodity prices. Previously, we are in view that the bottoming of commodity prices together with the ameliorating macroeconomic conditions have brightened the economic prospects and subsequently lifted the corporate earnings of emerging equities. Moving into 2017, these positive tiles have paved the way for emerging equities to tread higher.

At this juncture, we maintain our view that commodity prices will continue to find the middle ground between supply and demand against a backdrop of global economic recovery. As for the US dollar, we do not foresee a significant risk of a sharp appreciation in the US dollar, as the Fed have tended to ensure that market participants are aware of their intentions via process of communication prior to any policy changes. This allows any monetary policy action to be done in a measured and gradual manner. As such, we see little possibilities of a sharp appreciation in the US dollar. A relatively stable commodity prices and US dollar together points to lesser uncertainties for the emerging economies (see Figure 4).

FIGURE 4: Commodity prices and US Dollar’s implied volatility over past 3 years.

Encouraging Earnings Revision, Valuations Attractive

Earnings results for emerging market equities have been great this year, which also explains its stellar performance moving into 2017. Looking ahead, analysts have revised the earnings for emerging market equities in 2017 and 2018 upwards by 11.7% and 16.2% respectively year-to-date. We believe the macroeconomic environment has been conducive for corporate earnings thus far, thereby lifting the earnings’ prospect of companies operating within the emerging markets (see Figure 5).

FIGURE 5: Earnings revision for MSCI Emerging Market Index.

Previously in our 2H2017 outlook, we have mentioned that we foresee more earnings upgrade to come moving into the second-half of 2017. The view was based on the recovery of world’s nominal GDP growth, which is highly correlated between revenue growth and earnings growth for global equities. In view of firmer economic backdrop for China and that fundamentals remain intact for the other large emerging economies like Brazil, Russia and India, we expect emerging market equities’ earnings to remain supported at this juncture (see Figure 6).

FIGURE 6: Earnings for emerging market equities have strong correlation to Chinese imports.

Table 1: Earnings growth, valuation and dividend yields for MSCI Emerging Market Index.

Fair Value
2017 2018
PE Ratio (X) 13.5 14.0 11.9
Earnings Growth (%) - 25.6 17.5
Dividend Yields (%) - 2.4 2.6

Source: Bloomberg, iFAST compilations. Data as of 23 October 2017.

Looking into valuations, 2017’s PE ratio currently sits at a slight premium with respect to our fair PE value of 13.5X. However, 2018’s valuation is still standing at a discount. As earnings growth is expected to remain robust into 2018, there is still a considerable upside potential of 17.1% by the end of next year, taking into considerations of valuation expansion, earnings growth and dividend yields. For value investors and growth-seeking investors, emerging markets’ equities still offer a decent investment opportunity.

Why Eastspring Investments Global Emerging Markets Fund?

About the Fund

Incepted since January 2008, Eastspring Investments Global Emerging Markets Fund (EIGEMF) is a feeder fund that feeds into Schroder International Selection Fund Emerging Markets. The target fund has been around since April 2003, with close to 15 years’ worth of track record.

With regards to asset allocation, the target fund invests at least two-third of its assets in equities of companies in emerging markets. The target fund’s benchmark is the MSCI Emerging Markets Net Total Return Index. Although the fund is managed with reference to a benchmark, the fund is benchmark agnostic as the manager invests on a discretionary basis and not restricted by the composition of the benchmark.

As of end-September, we note that the fund is currently overweight on Brazil and Russia as compared to its benchmark. Its peer fund, Global Emerging Market Opportunities (GEMO), which feeds into Schroder International Selection Fund Emerging Market Opportunities Fund, has similar overweight position to the aforementioned countries, but the latter has an underweight position towards Greater China equities. Sector wise, the EIGEMF is overweight on Information Technology and Financials. This is also in contrast compared to GEMO, which underweights both sectors.

FIGURE 7: Geographical allocation to BRIC.
FIGURE 8: Sectors allocation.

From the above, we opine that EIGEMF has a potential to outperform its peer in the coming months, since we are in view that there are affirmative reasons as mentioned above for the earnings of Greater China equities to be revised higher. These positive earnings revisions, if materialise, will be a positive input to equity markets’ performance going forward.

Consistent Performance

The EIGEMF has posted resilient returns over the past few years, which allows it to make its way into our Recommended Fund List again this year. Table 2 below shows that EIGEMF has managed to outperform GEMO over the past 3 years across various periods, and at the same time delivered comparable risk-adjusted returns to investors (see Table 3).

Table 2: Return figures for emerging market funds.

Fund
1-mth (%)
3-mth (%) 6-mth (%) 1-Yr (%) 2-Yr* (%) 3-Yr* (%)
Eastspring Investments Global Emerging Markets Fund 2.3 6.4 14.7 27.3 16.6 16.8
Global Emerging Markets Opportunities 1.6 5.1 14.3 28.2 16.6 14.9

Source: Bloomberg, iFAST compilations. Data as of 23 October 2017. Returns in MYR terms inclusive of any income or distribution reinvested. *Annualised

Table 3: Risk-return metrics over the past 3 years.

Fund
1-Yr (%)
1-Yr Sharpe Ratio 2-Yr Vol (%) 2-Yr Sharpe Ratio 3-Yr Vol (%) 3-Yr Sharpe Ratio
Eastspring Investments Global Emerging Markets Fund 8.0 2.99 12.4 1.07 12.7 1.06
Global Emerging Markets Opportunities 8.3 3.01 12.1 1.10 12.0 0.97

Source: Bloomberg, iFAST compilations. Data as of 23 October 2017. Returns in MYR terms inclusive of any income or distribution reinvested. Risk-free rate used is 3.3%.

CONCLUSION

All in all, we are maintaining our positive stance on emerging market equities. Given that global economy recovery remains on track, plus an encouraging macroeconomic backdrop, earnings for emerging market equities are likely to remain well supported in the near-term. For investors who share the same view as us, you may tap into the investment opportunities residing within global emerging markets via Eastspring Investments Global Emerging Markets Fund.


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