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Emerging markets overlooked resilience

Many investors remain under-allocated to emerging markets, failing to recognise their increasing economic resilience, as well as their richness as a stock pickers’ hunting ground.

For the first time, each of the five funds in the Horizon multi-asset range can invest in Emerging Markets equities. This ability – possible since 5 November 2021 – presents new opportunities for investors and bolsters portfolio efficiency, all within the funds’ strict risk boundaries.

Why did we make this change? Embark Investments as Authorised Corporate Director, alongside the funds’ strategic asset allocator EV, frequently reviews the funds’ strategy and guidelines to give investors access to the broadest possible investment universe. This approach means that now, Horizon funds I, II, and III can access Emerging Markets equities for the first time, while funds IV and V can add to their exposure if needed.

So, why Emerging Markets equities, and why now? The answers are provided by Alex Lyle of Columbia Threadneedle Investments, the Horizon funds’ award-winning investment manager, and lie in the sector’s remarkable economic resilience, and the region’s readiness for stock picking.

Forty years ago, in 1981, the International Finance Corporation (IFC) proposed a new global investment fund for stock markets in developing countries. Its analysis of local market returns had revealed surprisingly attractive results. Emerging markets as an investment concept were born.

For much of the time since then the universe was dominated by cyclical companies and an investment in emerging markets was a bet on surging global trade from the 1990s to mid-2010s. What’s more, it was dominated by a handful of large companies, beyond which stocks were poorly traded.

Yet today the emerging market universe has changed fundamentally in ways that investors do not always appreciate. It is now dominated by structural growth companies catering to growing local middle-classes with rising living standards, giving emerging markets greater economic resilience to turbulence elsewhere in the world.

Take China, for instance, where the current drive to tighten regulations and foster “common prosperity” is partly backed by the theme of boosting the middle-classes’ spending power, so they can spend more on Chinese goods. In this way, Beijing is seeking to reduce the country’s reliance on exports.

Whether it’s growing consumer spending, increasing tourism or the pioneering of new products and services, the growing importance of domestic demand in these countries is exciting. Indeed, with 84% of the world’s population in developing countries1, emerging markets are fast becoming the dominant driver of global growth.

Mitigating topical risks

There is no denying, however, the challenges emerging markets face as they recover from the pandemic. Vaccine distribution is key, and headwinds remain in the near term. As restrictions on social distancing measures continue to ease, though, economic activity is rebounding to pre-Covid levels in much of the universe, with earnings revisions improving substantially. Meanwhile, political risk has declined.

Just as in developed markets, the outlook for inflation is a risk as central banks begin to moderate monetary policy accommodation. Globally there is mounting inflation as one would expect in a cyclical recovery. Even so, inflationary pressure tends to be subdued in emerging markets; it is perhaps more appropriately framed as “less deflationary”.

In China, specifically, new regulations in the technology sector have weighed heavily on investor sentiment since the end of 2020. The current regulatory cycle is part of the lead into elections next year, with Beijing focusing on the notion of common prosperity. Yet the government does not wish to dismantle the private sector. Further, many of its policy objectives are also on the wish lists of western economies: for example data privacy and curbing monopolistic practices.

Turning to US-China relations, a Biden administration brings lower political risk than his predecessor. Given the bipartisan support in Washington for its hard line policy towards Beijing – and the likely support of allied countries – it is hard to see any softening of US attitudes in the near term. It’s realistic, however, to expect more pragmatic and diplomatic discussions.

As a business we are focusing on the parts of the Chinese economy with policy tailwinds that will benefit from Beijing’s agenda of focusing on prosperity and productivity. This includes the semiconductor industry, the “made-in-China” localisation theme, biotechnology and electric vehicles, to name a few.

In emerging markets generally, we believe structural growth opportunities should remain core, and we are taking a barbell approach with the “opening up” trade.

An under-appreciated universe

It is hard to over-state the extent to which emerging markets have transformed themselves since the IFC invented the concept 40 years ago, and even more so since the global financial crisis. Since our global emerging markets equity team was formed in 2008 the number of stocks in the emerging markets universe has almost doubled, growing by 89%.2 That makes this a universe with a breadth and depth that is ideal for stock pickers.

What’s more, the resilience and independence of these economies has improved for reasons beyond heightened domestic demand. The development of local debt markets, the stabilisation of the interest rate differential between the US and emerging economies and the reduced reliance on foreign investment to finance growth, are all factors that point to the greater health of emerging markets.

It is fair to say that faltering globalisation and slow Covid-19 vaccine distribution pose challenges for many emerging market countries. Yet many investors have yet to appreciate the far greater resilience of emerging markets today, as well as their richness as a stock pickers’ hunting ground.

We would argue that investors remain largely under-allocated to emerging markets. This remains an under-appreciated universe, in terms of both the prospects for returns and the benefits of diversification.

If you would like to hear more from our experts at Horizon by Embark and Columbia Threadneedle, please watch the recording of our webinar where we are discussing the evolution of the Volatility Managed sector and sharing our guidance on how advisers can assess the funds within it and pick those most appropriate to clients’ circumstances.

The webinar – Through the maze: How advisers can navigate the IA Volatility Managed sector – is in partnership with Professional Adviser. Watch the recording for free here


1IMF, October 2019
2Universe constituents, as of June 2021.

About the authors

Thomas Rostron, CEO, Embark Investments

Thomas is the CEO of Embark Investments, following Embark Group’s acquisition of Zurich’s Authorised Corporate Director (ACD) & Investment Management (Zurich Investment Services (UK) Limited) businesses on 1 May 2020. Thomas has more than 30 years’ experience in asset and wealth management, including positions as Head of Global Fund Distribution at Fortis Investments and Managing Director Investment Management with Barclays Wealth.

Alex Lyle, Head of Managed Funds, EMEA, Columbia Threadneedle

Alex Lyle is Columbia Threadneedle’s head of managed funds for Europe, the Middle East and Africa. He takes responsibility for several of the company’s managed funds, is a member of the asset allocation committee and is a key investment contact between the company and a number of its major clients. He joined the company in 1994 and was appointed joint-head of the UK and European equity teams in 1999, and became head of managed funds in 2003. Lyle started his career at Hambros Bank’s unit trust division, which was acquired by Allied Dunbar in 1981 and subsequently became part of Threadneedle Asset Management in 1994. He managed UK equity portfolios for more than 20 years. He has a degree in geography from the University of Oxford.

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