HEAD-TO-HEAD: Nordea vs Templeton

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Investor sentiment for emerging markets continues to stay high.

“The case for [emerging markets] equities more broadly is tempered by the recent multiple expansion, but we still see a very strong case for EM equities on a relative basis, particularly versus US equities where valuations appear stretched,” said Michael Ho, UBS Asset Management CIO.

Commenting on the Asian markets, which makes up about 70% of the overall EM asset class, UOB Asset Management noted: “Despite the strong start to Asian markets, valuations remain reasonable and below the mean level on a price-to-book basis. The earnings revisions have also turned positive.”

The risk to emerging markets, cited by several industry sources, is the possibility of a global trade slowdown led by protectionist policies that could emerge from the US. Most EMs depend on global trade for economic growth.

MSCI EM Index vs MSCI EM Small Cap Index, as of June 30

Source: MSCI

However, small-caps are less impacted by macro events, according to Luke Ng, senior vice president of research at FE Advisory Asia. He said emerging market small-cap equity funds, of which there are only a few, offer potential outperformance with lower volatility than large-cap products.

“In emerging markets, large-caps tend more to be commodity related, which is generally more volatile in nature. Small-caps, meanwhile, lean on sectors such as consumer staples and discretionary, as well as healthcare, which are less cyclical, and less driven by global macro events, hence the lower volatility.”

Among 160 global emerging markets-focused funds for sale in Hong Kong or Singapore, small-cap-centric products have outperformed the rest of the asset class with the exception of frontier market funds, as reported earlier.

Against this backdrop, Ng compares two emerging markets small-cap products: the Nordea 1 Emerging Markets Small Cap Fund and the Templeton Emerging Markets Smaller Companies Fund.

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