Emerging markets funds likely to be at the vanguard of ESG investing over next five years

Emerging markets funds must use the next five years to ensure ESG is at the centre of investment philosophies, with the biggest environmental and social challenges located in the countries they invest in, RWC Partners’ John Malloy has said.

Coming off the back of a strong end to 2020, which was boosted by factors including the US’ announcement of a further $1.9trn of Covid-19 related stimulus, the challenge for emerging markets investors now is to focus on five years of real change across economies.

John Malloy, co-head of Emerging and Frontier Markets at RWC Partners, said a focus on ESG across emerging markets is paramount: there is significant scope in these markets to effect long-lasting change.

“On a global scale, emerging and frontier markets account for the largest share of the world’s population, land and mineral resources. They are the drivers of global growth and consumption. Sustainability is a function of their development, and it is therefore essential to promote responsible business practices, enforce human rights and environmental protection,” Malloy said.

“These are also high impact markets where a minor change can have major global consequences. Stopping deforestation in Brazil, reducing emissions in China, eliminating poverty in India, or finding a solution to water scarcity in Africa, for example, could change the entire planet. ESG considerations are vital when investing in developing countries, and if the next five years are to be the years of emerging and frontier markets, they will also be the years of ESG.”

The themes currently targeted by the RWC Emerging & Frontier Markets team include Technology Disruption, Financial Inclusion, New Auto Tech, Health & Fitness, Infrastructure Development, Education and Sustainable Energy, among others.

James Johnstone, who runs the RWC Next Generation Emerging Markets Equity Fund, is particularly positive on the outlook for emerging market commodities, with policy shifts on infrastructure spending in the US – as well as in China – likely to increase demand for commodities, especially those needed for energy transition.

“One area we are particularly positive on now is metals, which enjoyed a strong period of performance throughout the latter half of 2020, with gold, silver and copper all significantly up,” Johnstone said.

“From a macroeconomic standpoint, global monetary dynamics and further central bank purchases will likely support commodity prices from here. Valuations of companies exposed to commodities remain attractive relative to history, balance sheets are more stable, and capital expenditure plans are more rational.”

The RWC Global Emerging Markets Fund, which has just passed its five-year track record and delivered 127.75% since inception as of December 31 2020, versus the MSCI Emerging Markets Index’s return of 89%[1], currently has 29.8% of the fund invested in the materials and energy sectors, making them the biggest allocations within the portfolio.

In regards to geographic exposure, the team is positive on opportunities across Asia, Europe and South America, with valuations across emerging markets looking attractive and at relative lows compared to developed markets.

“In Asia, China, South Korea and Taiwan should see a continued economic rebound led by export growth and consumption. China was up +2.7% in December as PMIs remained robust, while exports growth was strong. Taiwan also rose +10.5% as the country’s growing technology sector continued to drive economic growth,” said Malloy.

“In Latin America, Brazil’s structural reforms will likely aid the country’s fiscal dynamics while the country’s PMIs remain expansionary. We also expect Russia will benefit from a higher and more stable oil price as it remains well-supported as demand recovers amid curtailed supply.”

Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.

[1] MSCI Emerging Markets Net TR delivered 88.54% in this time period