Following a difficult 2013 and early 2014, emerging market and Asia Pacific snapped back in the middle of last year and are currently outperforming developed markets such as the UK over the last 12 months.
Performance of sectors over 1yr
Source: FE Analytics
Ricketts, who heads up a number of multi manager portfolios, told FE Trustnet in August that the rally was nothing more than mean reversion following overselling in 2013 and was considering trimming his position.
“The point is, it was an easy decision to buy emerging markets in February and it isn’t now. The bargain has gone and though I still think they are good value, the overselling has reversed,” Ricketts (pictured) said.
However, as the oil price has fallen by close to 40 per cent over three months and is expected to remain weak for some time to come, Ricketts now expects emerging markets and Asia Pacific funds to build on last year’s gains.
“We saw that the ‘taper tantrum’ last year [when the US Federal Reserve warned the market it would start to reduce its quantitative easing programme] really hurt due to the need for foreign direct investment in emerging markets and Asia,” Ricketts said.
“But then from February, we have seen some good outperformance from emerging markets and Asia. While emerging markets fell off again, Asia has been relatively robust. The concerns about the oil price have actually been a benefitting factor as it comes as a tax break for those economies, like China, which are reliant on importing energy.”
“We were thinking about reducing our exposure after last year’s gains, but I think the low oil price will give them another leg-up.”
The oil price has fallen to just $51 a barrel over recent months due to a combination of factors: the US shale gas revolution, oversupply issues and as the OPEC countries decided not to step in and manage the market.
Ricketts is quick to point out, however, that the weak oil price will continue to hurt certain emerging markets such as Brazil and Russia – which are down 17.86 per cent and 27.30 per cent respectively over the last three months – given their status as oil exporters.
Performance of indices over 3 months
Source: FE Analytics
Nevertheless, he thinks a weak oil price will continue to support equity markets in Asia like India and China. The manager is also more bullish on Asia for another reason.
“There is also the view that China could start to stimulate soon. We saw Chinese equities bounce back last year and there is no question the market had been oversold [in 2013], so the question is whether they now look fully valued,” the manager said.
“However, we have seen that the fears over an economic collapse in China have reduced, certainly compared to this time last year.”
Ricketts currently holds 35 per cent of his £90m Margetts Venture Strategy fund in Asia Pacific equities and 33 per cent in global emerging markets.
He counts First State Global Emerging Markets, Fidelity Emerging Markets, Schroder Asian Income, First State Asia Pacific Leaders, Somerset Emerging Markets Dividend Growth, Newton Asian Income, Schroder Pacific and Fidelity South East Asia as top 10 holdings.
This historic overweight position in the developing world has meant the fund has strongly outperformed over the long term.
According to FE Analytics, it has been the third best performing portfolio in the 55-strong IA Flexible Investment sector over 10 years with returns of 146.47 per cent. As a point of comparison, the MSCI AC World index is up 123.93 per cent over that time.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Though it is back in the top quartile over one year, that exposure has weighed on performance over the medium returns and means it has underperformed the sector and index over three and five years.
Margetts Venture Strategy has an ongoing charges figure (OCF) of 1.77 per cent.
While Ricketts is relatively bullish on emerging markets and Asian equities, there are several experts who are continuing to avoid the developing world.
One of which is Andy Merricks, head of investments at Skerritts, who is steering clear of them in his client portfolios.
The major reason for that, Merricks says, is because the dollar will continue to strengthen as the US economy improves, as the likelihood of interest rate rises is increasing and as other developed markets face headwinds this year.
“Our lack of exposure to the emerging markets hurt our performance in the middle of last year, but we were glad that we stayed out by the time the year ended,” Merricks (pictured) said.
“A strong dollar is rarely a good thing for emerging markets, so if we’re right about the dollar we’ll be right about emerging markets. The correlation between emerging markets performance and that of resources is extremely strong, and we don’t see any rebound in the resources sector soon.”
“The geo-political risk in some emerging markets is also rising and our thoughts are that it will get worse before it gets better in the emerging markets sector.”