Sensitivity of selected EM equity funds to macro factors
The chart data shows the sensitivity of the five largest actively managed emerging markets equity funds to changes in macroeconomic factors: dollar trade-weighted index, global inflation, crude oil and global default spreads. IPE and PureGroup selected from the euro institutional classes of the largest domestic and cross-border funds registered for sale in UK, in terms of assets, from the Morningstar database.
The selected funds are:
• Vontobel Emerging Markets Equity
• JPMorgan Emerging Markets Equity
• Comgest Growth Emerging Markets
• Robeco Emerging Conservative Equities
• TOBAM Anti-Benchmark Emerging Markets Equity
The higher the sensitivity of each fund to the macro factor, the higher the probability that performance will respond to changes in that factor. The graphs show the sensitivity of the funds to the factors, while the bar charts below show the monthly year-on-year change of the factors over the past five years. The data was analysed using PureGroup’s Forward Perspective Model, a macroeconomic factor model built for the investment industry, covering open-ended, closed-end and exchange-traded products.
The backdrop to global economic markets is one of continued uncertainty with several mixed and at times conflicting messages across standard indicators. As outlined in the International Monetary Fund’s World Economic Outlook in October, prospects remain diverse across emerging market and developing economies, with some improvements for a few large emerging markets.
Global default spreads
Over the past years, emerging market corporates found low US rates advantageous and borrowed heavily in dollars. However, these companies may now struggle to repay their debts with interest rates rising in the US, especially if central banks in their own countries eventually follow the Federal Reserve in raising domestic interest rates. Some large Asian corporates may also be vulnerable to any problems that may arise in China’s banking sector.
All of the funds with the exception of the Robeco would have a positive contribution to their performance during markets characterised by expanding default spreads. Vontobel has the highest positive sensitivity, followed by JP Morgan, Comgest and TOBAM. All of these would be expected to have a positive effect on performance.
With increasing US interest rates, there is the potential of sustained depreciation in emerging market currencies that may increase inflation rates in these countries, especially as reluctant central bankers delay monetary policy tightening. The historical trends to this factor have been fairly consistent for the peer group, with Vontobel, Robeco and TOBAM funds having a significant positive sensitivity to the factor. They are therefore likely to have a positive contribution to their performance during inflationary cycles. On the contrary, the Comgest fund will have a negative performance contribution during these cycles.
The recent announcement by the Organization of the Petroleum Exporting Countries (OPEC) on the future reduction in production capacity, while still to be ratified and excluding non-OPEC producers such as Russia, has the potential to raise the price of crude over the short to medium term, even against challenging macroeconomic conditions for developed economies.
Assessing the group we can see significant divergent impacts to this macroeconomic factor. The Comgest fund is the only fund to have a positive sensitivity to this factor, leading to a positive outcome during markets with increasing crude prices. The other funds will have neutral or negative contribution to their performance, and TOBAM has the highest negative sensitivity to crude oil as a factor. Interestingly, the Robeco fund has seen the most significant style change over the past 18 months from a strong positive sensitivity to a neutral position.
Dollar trade-weighted index
Higher US interest rates and risk-off market sentiment may lead to the dollar gaining in value against the currencies of countries whose central banks are not raising interest rates.
The peer group has clearly divided sensitivities to this macro-economic factor. The Vontobel fund is likely to generate positive performance during cycles defined by a strengthening dollar, while all the others funds could see a potential headwind to their performance.
Patrick Murphy, director, PureGroup puregroup.io/academic-research