For example, South Korea’s Innox Corp and China’s Sanan Optoelectronics have generated returns in excess of Apple’s since the 2007 launch of the iPhone, for which they both make components.
Value matters as well. Particularly in China, risk is inherently mitigated by the fact many stocks trade at deep discounts.
It might also be worth remembering that developed economies are themselves nowadays far from risk-free, as evidenced by everything from the lingering impacts of Brexit to the threat of a US civil war after the forthcoming presidential election.
Diversification
One aspect of EM it is worth exploring is the role it can play in diversifying portfolios.
In four of the past six years global equity funds have been the best-selling net retail sector in the UK, according to the Investment Association.
The MSCI ACWI index has more than 63 per cent exposure to the US. China, the world’s second-largest global economy, gets less than 3 per cent. Fifth-largest India is somewhere in the 'other' part of the pie chart.
Microsoft, Apple and Nvidia each represent more in the index than the whole of China. Many global funds reflect that asset allocation, too.
Historically, EM countries have been very dependent on the health of the US for their own wellbeing. Not for nothing was it said that when the US sneezes the rest of the world catches a cold.
But one of the results of the global financial crisis and more recent geopolitical tension was that governments in China and the rest of Asia made the decision to be cushioned from demand shocks in future.
Self-sufficiency is building. They are trading more with each other than historically. They are becoming less dependent on the US and more interdependent.
This means that though a major slowdown in the US will have knock-on effects in many EM countries, it might be less than we would have historically expected.
Arguably, then, having a portion of a client’s portfolio in EMs may mitigate concerns you might have about valuations in the US and particularly the extent to which a handful of companies now dominate many portfolios.
Opportunities
The great excitement over EM companies when they first captured the popular investor imagination was the opportunity for strong growth. These companies were in regions of growing wealth.
As we have seen, they often had a part to play in areas of secular growth, like the rise of the smartphone and more recently the electric car.
Many companies have become global giants, like Korea’s Samsung. Artificial intelligence has created huge demand for high-quality chips. TSMC – the Taiwan Semiconductor Manufacturing Company – is one of the most successful and is responsible for manufacturing many of Nvidia’s chips. Kia Motors – part of the Hyundai group – produces more than 1.4mn vehicles a year.
