Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Speaking about Emerging Markets as a whole can be tricky. This is a vast universe. Grouping giants like China and India together with their smaller counterparts can feel more like an exercise in convenience than wisdom.

One reason for speaking of Emerging Markets generally is that they’re often exposed to the same macro headwinds. Right now, as global growth stagnates in the wake of the pandemic, the structural growth opportunities inherent in an Emerging Market could pose opportunities that Developed Markets, with their low interest rates and mounting fiscal deficits, cannot.

This could make now an interesting time to invest. The IMF thinks Emerging Markets will grow by 6% next year, outperforming the world’s developed economies by just over 2%.

They’re abetted too by a falling US dollar. The dollar has played its role as a safe haven currency for much of this year with aplomb, but its fortunes are starting to slide. Lowering interest rates across the pond and widespread market optimism heading into 2021 are making the currency less attractive to investors.

A lower dollar is traditionally good news for the rest of the world, and Emerging Markets in particular. Over the past 20 years, when the dollar weakened at least 5%, Emerging Market equities have gained on average 19% in dollar terms. That’s because, during periods of dollar weakness, many Emerging Market governments take the opportunity to borrow cheaply and at favourable exchange rates. That in turn could help bolster growth in those regions.

Valuations in Emerging Markets are also looking favourable relative to the rest of the world. Even after some recent outperformance in November, the MSCI EM index is trading at a 30 per cent discount to the MSCI World index based on 1 year forward price to earnings ratio.

But not all Emerging Markets were made equal. A market like China’s and one like Ireland’s share little in common beyond an Investment Association fund sector. As such, their respective outlooks are likely to diverge even if they share a similar backdrop.

To start with, China’s pandemic recovery looks a lot better right now than Ireland’s. Across Northern Asia, and in China, South Korea and Taiwan in particular, efforts to stem the virus have been highly successful. As their countries recovered, so did their markets. China’s CSI Index is up more than 25% over the year, outpacing the US S&P 500 (which itself has rallied well, buoyed by large tech companies) by a considerable margin. It’s best not to compare either with the FTSE 100. Please remember past performance is not a reliable indicator of future returns.

There are a few ways to look at that. One is to see greater short-term prospects in some Emerging Markets, like those of Northern Asia, than others, like Latin America and Emerging Europe, where the virus is still rife.

Another is to look past the short-term and make out greater long-term potential in the latter. Latin America in particular has a lot of ground to make up since it bottomed in April and May. The rollout of a vaccine should help with that. The region also stands well poised for any rotation away from the fast-growing defensive stocks that have performed well over pandemic to cyclical, out-of-favour value stocks that could enjoy greater fortunes in a post-COVID world.

Another still is to recognise that Emerging Markets, taken as a whole, offer a better-diversified opportunity set than you might expect. There’s a temptation to mistake the story of Emerging Market’s with that solely of China’s. Better is to recognise that China’s growth is only one part of a diverse range of opportunities, and risks, contained under one banner.

As such, a fund which invests in Emerging Markets across the globe could be a good option for investors looking for a diversified approach. One of our Select 50 choice of favourite investments is the Artemis Global Emerging Markets fund. The fund has most of its holdings in Emerging Asia, but also has exposure to Africa, Latin America and Emerging Europe.

If you’re looking for something with a greater regional focus, another Select 50 recommendation is the Stewart Investors Asia Pacific Leaders Sustainability. The fund also invests the majority of its holdings in Emerging Asia and has a sustainability focus. It’s one of Tom Stevenson’s picks for funds to invest in for 2021. You can find the rest of Tom’s picks here.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered:

Active investing; Asia & emerging markets; Funds

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