Why Emerging Markets Look Attractive Now

Long-term economic growth, a rising middle class, and attractive valuations make emerging markets a compelling investment.

Stock markets of emerging market countries are known for their dramatic ups and downs, and the last couple of years have been no exception. After lagging the U.S. market for several years, emerging market stocks shot up in 2017. In 2018 trade tensions and rising interest rates spooked investors, and by the end of the third quarter they had suffered a significant pullback for the year.

While emerging market stocks are known for being quite volatile, longer-term trends for the group are moving in a positive direction on a number of fronts.

Economic growth. After years of tepid economic growth many emerging market economies have picked up the pace since 2017, and are expanding at a much faster clip than developed markets. The World Bank expects 2018 growth to clock in at 4.5 percent, compared to 2.2 percent growth for developed markets in 2018. In 2019, emerging and developing economies are expected to grow 4.7 percent, more than twice the 2 percent growth rate anticipated for advanced economies. Many emerging market economies now have improving fundamentals, with lower current account deficits and healthier currency reserves to buffer against shocks.

A rising middle class. As economic expansion progresses, populations are moving away from poverty and gaining a firm foothold in the middle class. This has been a boon to technology, financials, health care, and other sectors driven by consumer demand. More and more people are using banks for the first time, often through mobile phones and other digital devices. "I've lived and worked in developing and emerging markets, and the importance digital banking in these regions shouldn't be underestimated," says Nick Robinson, investment director at Aberdeen. "It paves the way toward more formal economies where workers pay income taxes and borrow money to buy cars, televisions, and houses."

Stronger corporate balance sheets. The economic upturn, backed by the tailwind of consumer buying power, has also translated into good news for some emerging market companies. They've been paying down debt, generating more cash, and delivering positive earnings surprises. The shift in fortune has been particularly marked in countries that saw the most dramatic economic dips, such as Russia and Brazil.

Attractive valuations. Because equity returns in emerging markets have lagged developed markets for most of the last decade, overall stock valuations are attractive compared to the rest of the world. "Emerging markets are selling at a discount of about 30 percent relative to developed markets, which is quite wide by historical standards," says Robinson. "We see a lot more attractive opportunities than we did last year."

Despite these positive trends, Robinson cautions that risks remain. Most notably, the U.S. - China trade tensions could have an impact on worldwide economic growth. Rising interest rates threaten to choke growth and increase leverage among governments, companies, and consumers. Volatility is likely to persist in emerging markets as expectations for faster than expected rate increases and a strengthening U.S. dollar curb investors' risk appetite. The political scene in some countries remains uncertain, especially in Latin America.

Active Management Matters

Investors can choose to navigate today's uncertain and fast-paced emerging markets in a number of ways. Some investments, including exchange-traded funds, follow well-known indexes. Others label themselves as actively managed, but to avoid deviating too much from the crowd their security selections and sector and country weightings hew very closely to benchmarks. These types of passive or quasi-active strategies usually follow broad market trends very closely.

By contrast Aberdeen Emerging Markets Equity Income Fund (AEF) has no index constraints and is not bound by a fixed investment menu. Instead, managers look for the best opportunities regardless of where their research uncovers it.

Because many companies in emerging markets are under-followed by analysts, active management and independent research can be particularly effective for zeroing in on attractive buy candidates that fly below the radar screens of most investors, as well as identifying problems others may not be aware of. Whether they are global household names or up-and-coming leaders in their home countries, the companies that make it into the portfolio must pass through rigorous screens for quality, have a high and growing dividend, or be well on the path toward become strong dividend generators.

In addition to seeking out investment opportunities, the managers are constantly on the lookout for ways to help curb risk. To Robinson, one of the biggest risks in the emerging markets now is possible escalation of the trade war between the U.S. and China. "I think things will get worse before they get better," he says. "I don't see a catalyst for cooling tensions." A sharpened focus on emerging market companies that derive all or most of their revenue from domestic sources, rather than exports that may be impacted by trade wars, is a theme that runs throughout the portfolio.

Concern about trade difficulties is one reason the fund is significantly underweight relative to the benchmark in China. "We also find it more challenging in China to find good quality companies because of the strong influence the government has on the private sector," says Robinson.

The fund is overweight relative to the benchmark in Brazil and Mexico, where significant political changes are helping produce positive economic results and better corporate earnings. India, where a strong economic rebound in 2018 and rising middle class is benefitting consumer-driven businesses, also merits an overweight position.

Why Aberdeen?

Aberdeen Emerging Markets Income Fund's closed-end fund structure offers a number of distinct advantages when investing globally. Because closed-end funds have a fixed pool of capital, investors are not exposed to forced redemptions during times of market volatility, as they usually are with open-end mutual funds. Asset managers can stick to a long- term investment strategy without having to worry about the dilution effects of holding cash to meet redemptions. As a closed-end investment, the fund can also offer opportunities for capital appreciation when the shares trade at a discount to net asset value, and that discount narrows or disappears.

An important part of the investment process at Aberdeen is an environmental, social, and governance (ESG) assessment that can reveal critical information about a company's values and practices, as well as potential risks for investors. A growing body of evidence suggests that when companies are careful to maintain ESG standards, they less likely to generate the kind of negative publicity that hurts shareholders.

Headquartered in Aberdeen, Scotland, and with 46 offices in 24 countries, Aberdeen Standard Investment is uniquely positioned to capitalize on the world's most promising global opportunities, regardless of where they originate. With $735.5 billion under management, as of June 30, 2018, across diverse asset classes, the firm delivers original thinking and proprietary research that few companies can match.

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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.

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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.

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Important information

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.

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