It has been a challenging year for emerging markets, but it does not mean the opportunities are lost for long-term investors.
It has been a challenging year for emerging markets (EM) with the main index down around 10%.1
Negative sentiment has been driven by the intensifying U.S./China trade war, higher U.S. interest rates, a stronger U.S. dollar and twin crises in Turkey and Argentina.
Equity markets have fallen in response. So is it time to remove your money from EM?
While periods of volatility are never comfortable, we believe it is important to look at events through a long-term lens.
From that perspective, we not only think that EM will weather the current storm but have the potential to deliver strong returns.
Why the sell-off?
The current upheaval in emerging markets is due to a number of factors - chief among them the threat of a trade war between the U.S. and China. This has seen each side impose a series of retaliatory tariffs on a variety of goods, culminating in U.S. President Trump slapping 10% tariffs on $200 billion of Chinese products at the end of September.
This has weighed on sentiment across emerging markets, notably Asia. The concern is that the standoff could escalate further, destabilizing the global trading order.
Whatever the reasons lower correlations between world markets is, in many ways,
good news for international investors. For those seeking to reduce risk exposures, it
provides a tailwind for the traditional benefits of geographic diversification to kick
in without sacrificing the potential to generate returns.
How likely is that to occur?
While we can't rule anything out, we think the chances are remote.
First, the latest tariffs must be put into perspective. Despite all the bluster, the economic impact of these tariffs has thus far been fairly limited (the latest tariffs account for 0.1% of China's economic output).
Second, when viewing the negotiations we should take into account what the U.S. administration would deem a success in achieving its policy aims. The current approach reflects President Trump's key political goals: confronting China economically and strategically, while restoring jobs in domestic manufacturing.
Once he deems these to have been met, we may see a sea change in negotiations. After all, despite much sabre rattling, the U.S., Mexico and Canada agreed a revised version of NAFTA (known as USMCA) in relatively short order.
The final terms also closely resemble those of its predecessor. We wouldn't be surprised to see a similar 'victory' in the China/U.S. trade spat - a victory Trump may be keen to secure in light of the Republican's disappointing showing in the U.S. mid-term elections.
Away from tariffs, officials in Beijing have demonstrated their willingness to support the country's economy, including recently injecting $22 billion into the financial system via its medium-term lending facility.
This followed the official removal of a foreign-shareholding cap in domestic banks and asset managers. We would expect this type of support from policymakers to continue, if and when it is needed.
Given China's importance in the global economy, this will help bring stability to EM, notably in Asia.
Not about EM
Perhaps more important is the strength of the U.S. dollar, driven by U.S. Federal Reserve (Fed) interest rate rises and the anticipation of further monetary tightening. This has adversely affected countries with large dollar-denominated debts, notably Turkey and Argentina.
Looking more closely at Turkey, its government and corporate sectors have made the mistake of gradually accumulating large dollar-denominated debts, while relying on income in Turkish lira to repay these foreign currency liabilities.
The precipitous fall in the lira, compounded by the country's stubbornly loose monetary policy over much of the year, has now made dollar debts considerably harder to repay.
It has also rendered lenders more reluctant to provide new loans given pronounced concerns about worsening asset quality. The political climate in Turkey also destabilised markets, notably around the independence of the country's central bank.
In our view, Turkey and Argentina are more outliers than portents of what's to come. After all, only Turkey is currently included in the MSCI EM Index and accounts for less than 1% of the index. Any fallout should therefore be minimal.
Of course, as we saw in the Asian crisis of the 1990s, there is always the potential for contagion.
Today, though, most EM economies are in better shape than they were during the Asian crisis of the 1990s. Debt levels are relatively low as a proportion of GDP, and have longer maturities with emerging market central banks now holding a much larger stock of dollars in their reserves.
A much greater proportion of debt is also now issued in local currencies, so the risk of currency mismatch is smaller. Fiscal and monetary policy institutions have improved, and debt markets have matured and deepened.
Finally, during the Asian crisis, many countries had large current-account deficits, draining foreign currency reserves. This time most countries have much smaller imbalances.
Compelling range of choices
While EM performance may have suffered, there remains a multitude of attractive opportunities for active equity investors. Over the last decade, improved economic conditions have resulted in a marked expansion of the EM equity universe; there are now over four times as many emerging market companies spread all around the world in which to invest than there were in 2003.
Numerous corporations in EM are already out-competing their developed-world rivals in more markets across highly sophisticated sectors, such as electrification, automation, artificial intelligence and machine learning.
In addition, EM valuations are now well below their historic average discount to developed markets.
As such, the recent volatility is creating compelling opportunities to invest in the high-quality businesses that have the potential to outperform over the long term.
So, while recent EM upheaval is unwelcome, the asset class still offers a compelling opportunity for investors willing to take a long-term approach.
1 Source: MSCI Emerging Market Index 1/01/2018 to 11/13/2018
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
Aberdeen Standard Investments is a brand of the investment businesses of
Aberdeen Asset Management and Standard Life Investments.
Closed-end funds are traded on the secondary market through one of the stock
exchanges. The Fund's investment return and principal value will fluctuate so that an
investor's shares may be worth more or less than the original cost. Shares of closed-
end funds may trade above (a premium) or below (a discount) the net asset value
(NAV) of the Fund. The net asset value (NAV) is the value of an entity's assets less the
value of its liabilities. The market price is the current price at which an asset can be
bought or sold. There is no assurance that the Fund will achieve its investment
objective. Past performance does not guarantee future results.
Under U.S. tax rules applicable to the Fund, the amount and character of
distributable income for each fiscal year can be finally determined only as of the end
of the Fund's fiscal year. The Fund anticipates that sources of distributions to
shareholders may include net investment income, net realized short-term capital
gains, net realized long-term capital gains and return of capital. The estimated
composition of the distributions may vary from time to time because the estimated
composition may be impacted by future income, expenses and realized gains and
losses on securities. For more detailed information related to the composition of the
Fund's distributions, see aberdeenAOD.com.
Foreign securities are more volatile, harder to price and less liquid than U.S.
securities. They are subject to different accounting and regulatory standards, as well
as political and economic risks. These risks are enhanced in emerging markets
countries. Equity stocks of small and mid-cap companies carry greater risk, and
more volatility than equity stocks of larger, more established companies.
Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
Commentary contained within this document is for informational purposes only, and is not intended as an offer or recommendation with respect to the purchase or sale of any security, option, future or other derivatives in such securities. Some of the information in this document may contain projections or other forward-looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make his / her own assessment of the relevance, accuracy and adequacy of the information contained in this document, and make such independent investigations, as he/she may consider necessary or appropriate for the purpose of such assessment.
Any opinion or estimate contained in this document is made on a general basis and
is not to be relied on by the reader as advice. Neither AAM nor any of its agents have
given any consideration to nor have they made any investigation of the investment
objectives, financial situation or particular need of the reader, any specific person or
group of persons. Accordingly, no warranty whatsoever is given and no liability
whatsoever is accepted for any loss arising whether directly or indirectly as a result
of the reader, any person or group of persons acting on any information, opinion or
estimate contained in this document.
The MSCI information may only be used for your internal use, may not be
reproduced or redisseminated in any form and may not be used as a basis for or a
component of any financial instruments or products or indices. None of the MSCI
information is intended to constitute investment advice or a recommendation to
make (or refrain from making) any kind of investment decision and may not be
relied on as such. Historical data and analysis, should not be taken as an indication
or guarantee of any future performance analysis forecast or prediction. The MSCI
information is provided on an "as is" basis and the user of this information assumes
the entire risk of any use made of this information. MSCI, each of its affiliates and
each other person involved in or related to compiling, computing or creating any
MSCI information (collectively, the "MSCI" Parties) expressly disclaims all
warranties (including without limitation, any warranties of originality, accuracy,
completeness, timeliness, non-infringement, merchantability and fitness for a
particular purpose) with respect to this information. Without limiting any of the
foregoing, in no event shall any MSCI Party have any liability for any direct, indirect,
special, incidental, punitive, consequential (including, without limitation, lost
profits) or any other damages (www.msci.com).
Effective the close of business May 4, 2018, Aberdeen began managing the Aberdeen Total Dynamic Dividend Fund, which until May 7, 2018 was known as the Alpine Total Dynamic Dividend Fund. Performance information for periods prior to May 4, 2018 reflects performance of a prior, unaffiliated investment manager.
As of close of regular business on April 27, 2018, the reorganization of seven closed-end funds into the Aberdeen Chile Fund, Inc. (CH) was successfully completed. CH changed its name, ticker symbol, benchmark, investment objective and strategy effective April 30, 2018. Aberdeen Latin American Equity Fund, Inc. is the performance and accounting survivor for AEF. Performance information for periods prior to April 30, 2018 do not reflect the current investment strategy.
Disclaimer - Aberdeen Emerging Markets Equity Income Fund
Pursuant to valuation policies adopted by the Board of Directors of the Fund, the Fund values foreign equity securities that primarily trade in certain markets that close ahead of the Fund's daily 4:00 pm Eastern net asset value ("NAV") calculation time at their fair values using prices provided by third-party independent pricing services. The fair value of each such security generally is calculated by applying a valuation factor provided by the independent pricing service to the last sales price for that security, or, if, the pricing service is unable to provide a fair value for a security, at the price at the close of the exchange on which it is principally traded, subject to adjustment by the Fund's Pricing Committee. These daily fair valuations seek to reflect information available after the local market close that may affect the value of the foreign equity securities held by the Fund. As a result, this official NAV calculation reflects adjustments that may cause it to vary from a calculation based solely on closing prices. In contrast, the "Unadjusted NAV" of the Fund (shown above) is for informational purposes only and is computed using the closing prices on the relevant exchange. It does not reflect any daily fair valuation adjustments of the Fund's foreign securities. The Unadjusted NAV does not represent the official NAV of the Fund, nor is the Unadjusted NAV used for Fund accounting or performance purposes. Investors should not rely upon the Unadjusted NAV when making their investment decisions.
Closed-end funds are traded on the secondary market through one of the stock exchanges. The Fund's investment return and principal value will fluctuate so that an investor's shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund's portfolio. There is no assurance that the Fund will achieve its investment objective. Past performance does not guarantee future results.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.
The use of leverage will also increase market exposure and magnify risk.
Dividends are not guaranteed and a company's future ability to pay dividends may be limited.
Privacy and cookies policy
Business Continuity Management & Disaster Recovery Programs
There can be no assurance that the Board will maintain the Fund's distribution rate at a particular level, or that the Board will continue a managed distribution policy. Additionally, distributions may include return of capital as well as net investment income and capital gains. If the Fund's investments do not generate sufficient income, the Fund may be required to liquidate a portion of its portfolio to fund these distributions. If the Fund's distributions consist of a large amount of return of capital, it may result in a deterioration of the Fund's assets.
Aberdeen Asset Management Inc. has been registered as an investment adviser under the Investment Advisers Act of 1940 since August 23, 1995.
In the United States, Aberdeen Asset Management (AAM) is the marketing name for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Managers Ltd, Aberdeen Asset Management Ltd, Aberdeen Asset Management Asia Ltd and Aberdeen Capital Management, LLC. Excluding Aberdeen Capital Management LLC, each of these advisers are wholly owned by Standard Life Aberdeen Plc. Aberdeen Capital Management, LLC is a wholly-owned subsidiary of Aberdeen Asset Management Inc.
This site does not provide financial or investment advice and does not take into account the particular financial circumstances of individual investors. Before investing, investors should seek their own professional advice.
All information contained in this website is provided in good faith and is believed to be accurate and reliable at the time of compilation. The information in this website is provided "as is" and on an "as available" basis without warranties of any kind. Aberdeen does not warrant that the information on the Aberdeen website will be uninterrupted or error free, or that any information, software, or other material accessible from or related to the Aberdeen website is free of viruses, worms, or other harmful components.
Some of the documents on this website may contain links to information created and maintained by other, unaffiliated organizations. The Aberdeen Group does not control, cannot guarantee, and is not responsible for the accuracy, timeliness, or the continued availability or existence of this outside information.
Copyright of this material is owned by Aberdeen. Aberdeen expressly prohibits the dissemination, reproduction or transmission of any of the contents of this site in any form, other than for personal use.
"Aberdeen" is a U.S. registered service mark of Aberdeen Asset Management PLC