Claire Dwyer, Fidelity International
After a protracted period in the doldrums, emerging market equities have made something of a comeback recently. ‘Lower for longer’ interest rates looking increasingly like ‘lower forever’ have been a clear driver of flows into the asset class, but a recovery in oil prices and attractive relative valuations are helping too.
Arguably the most remarkable global development of 2016 so far has been the continued decline in global bond yields. Some 36% of all sovereign bond yields are now offering negative yields with only 6% offering yields above 2%.
This matters greatly for all asset classes, including emerging market equities, because the decline in yields of perceived safe-haven country government bonds is arguably similar to a decline in the global risk free rate, which rationally makes holding riskier and higher yielding assets more attractive if you think about it in relative terms.
And then there’s the oil price…
Many emerging market economies are heavily reliant on commodities. Historically emerging market equities and commodities have tended to move in a broadly similar direction. Given this, the recent recovery in oil prices is important. Brent crude hit a closing low of $27.92 per barrel on 20 January 2016, but has since rebounded by over 50%.
The effects of monetary policy, too, can’t be ignored.
Emerging market equities are widely seen as among the biggest beneficiaries of the unprecedented loosening of monetary policy globally. Unsurprisingly in the past few years, they have been hugely sensitive to any signs of policy tightening, especially from the US Federal Reserve. However, the US Fed has consistently surprised the market by normalising its monetary policy more slowly than expected, even compared to its own forecasts.
When the much-feared first US rate hike finally arrived in December 2015, emerging market equites and emerging market assets in general responded with impressive equanimity, with the MSCI EM index having risen by 12% since.
This resilience probably reflects the significant paring back of US rate rise expectations over this time period. Only one further rate rise is now expected in the whole of 2016, and expectations for the long term ‘terminal’ Fed funds rate have been reduced to 3.0%. Moreover, this has combined with further policy easing from the world’s three other major economic players, Europe, Japan and China.
What’s Fidelity’s solution?
The Fidelity Global Emerging Markets Fund unearths opportunities in some of the world’s fastest growing economies. It is an actively managed, highly concentrated portfolio of emerging markets securities.
We only invest in businesses we understand
A disciplined investment process –seeks quality stocks to minimise risk of capital loss
Insights from 53 dedicated emerging market equity analysts¹
Global knowledge pool of over 400 Fidelity investment professionals²
One global team sharing ideas on investment themes and ideas
First-hand knowledge with 90% of research produced in-house
¹, ² Source: Fidelity International, 30 June 2016. ‘Investment professionals’ includes portfolio managers, analysts, research associates and traders. References to specific securities should not be taken as a recommendation to buy, sell or hold these securities and may not represent actual holdings in the portfolio at the time of this viewing. For illustrative purposes only.
As at 31 August 2016
(16/12/13) % pa
|Fidelity Global Emerging Markets Fund
|MSCI Emerging Markets Index NR
Past performance is not a reliable indicator of future performance. The benchmark is the MSCI Emerging Markets Index. Net returns are calculated using mid-prices and are net of Fidelity’s management costs, transactional and operational costs. The calculation assumes reinvestment of distributions. No allowance has been made for tax or the buy-sell spread. The return of capital is not guaranteed. Please visit fidelity.com.au for detailed information on the performance of the Fund mentioned in this document.
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