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 Investors have already started dumping emerging assets in January,
pushing stocks to 6-1/2-year lows, while another 20 percent fall in
oil is ramping up pressure on producers.
That presents a challenge after 2015's strong rebound in Moscow
stocks, which helped Russian-focused equity managers earn
double-digit returns. They filled three of the top 10 slots in a
league table of fund performance based on data from Lipper.
"The key risk is related to the oil price," said Vladimir Tsuprov,
chief investment officer of TKB Investment Partners, which advises
the second-placed Parvest Equity Russia fund. A deeper oil price
decline that weakens the rouble further could rule out interest rate
cuts, he said.
Thomas Smith, deputy manager of the Neptune Russia & Greater Russia
Fund, which was ninth in the league table, foresaw another
contraction in Russia's economy and a budget deficit of 3 percent of
GDP or more.
In this difficult environment, Smith said non-traditional exporters
such as technology stocks would be the winners. He attributed some
of his fund's outperformance in 2015 to investments in email service
Mail.ru and software developer Luxoft.
Tsuprov also said a position in Luxoft had paid off in 2015, as had
investments in Nord Gold and oil producer Surgutneftegas, which
benefited from falling costs on the back of a weaker rouble.
But with commodity prices tumbling, Tsuprov is also focusing on
local demand-oriented companies such as mobile operator MTS, which
offers a healthy dividend yield.
Similarly, investing in consumer stocks with a dominant local market
share helped Invesco's Korean Equity fund to top the league table
despite South Korea's deteriorating growth and falling exports, its
manager Simon Jeong said.
Three Chinese equity funds survived a rollercoaster ride in 2015 to
make the top 10. The bottom of the table was dominated by equity
funds focused on Brazil, whose economy was hammered by a corruption
scandal, a ballooning budget deficit and high inflation, and Latin
American stocks more broadly.
The average performance for the Lipper Global EM equity fund sector
as a whole was -9.5 percent. Some $69.2 billion was pulled from EM
equity funds globally in 2015, according to preliminary data from
fund flows research house EPFR Global.
DODGING BULLETS
For bond investors, dodging bullets was just as important as
participating in the year's big turnaround stories, chiefly Ukraine
and Argentina.
"Volatility is high, liquidity is poor and fund performance hasn't
been good across the industry," said Richard House, manager of the
second-placed Standard Life Investments Emerging Market Debt Fund.
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The average performance for the Lipper Global EM bond fund sector
was -5.7 percent, with local currency funds losing the most. The JP
Morgan local currency sovereign debt index fell over 15 percent in
2015 whilst its hard currency sovereign and corporate debt
benchmarks returned just over 1 percent.
Some $32.6 billion was pulled from EM bond funds globally in 2015,
according to EPFR Global.
"Local market funds have been an outflow asset class for a while, as
performance has been poor and that experience is going to impact
people's mindset going forward," House said.
Claudia Calich, manager of the first-placed M&G Emerging Markets
Bond fund, said she outperformed by keeping local currency exposure
to just 10 percent and avoiding some of the credits hurt by falling
commodity prices, such as Iraq.
She also managed to catch the rallies in Ukraine and Argentine debt.
For 2016, she favors hard currency debt from central America and the
Caribbean, where economies benefiting from overseas workers'
remittances should do well from a stronger U.S. labor market.
SLI's House added that in markets such as Brazil or Venezuela where
prices were at extreme levels, significant asset price gains could
follow political change. For instance, markets might see the
impeachment of Brazilian President Dilma Rousseff as a positive for
reforms, he said.
"Even a period of stability would be good for emerging markets,"
House said. "The carry is becoming compelling, so even if you get
stability you will make decent money in context of decent yields."
But Calich warned tail risks would remain elevated in 2016 following
defaults in the Brazilian construction sector and pressure on some
commodity-related credits.
"We are still transitioning to an environment with lower commodity
prices and higher financing costs," she said. "We haven't finished
with this process but valuations are improving. It won't be an easy
year but if you manage your risk properly, there are opportunities."
(Additional reporting by Sujata Rao; Editing by Catherine Evans)
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