Development of Emerging Market equities
Over the last ten to 15 years, US equities have outperformed Emerging Market equities. This can be attributed to the many technology giants that emerged in the US during this period. At the same time, the previously rapidly risen Chinese stocks digested the massive growth of the preceding decades, and another significant transformation began in the Chinese economy. In parallel, India awoke from its slumber and has become one of the top countries economically and in stock performance in recent years.
Within the Emerging Markets, movements were similar to those in many developed markets: individual sectors such as technology, finance and, in some cases, consumption and healthcare showed enormous growth, while other sectors stagnated or even shrank.
Current development of Emerging Markets
Find out more about current developments in the Emerging Markets
Equity selection in the Emerging Markets
In both, developed and merging markets, a good selection of companies, sectors and countries is therefore more than ever a key success factor. This is precisely where the many years of expertise of our experienced fund managers come into play. Investments in Emerging Markets (in equities as well as in bonds) are a core competence of Raiffeisen KAG. 14 of our investment specialists are dedicated exclusively to these markets and have a total of around 25 years of industry experience.
What speaks in favour of the Emerging Markets?
The strong differentiation between sectors and regions does not mean that fundamental country-specific factors (such as economic and fiscal policy prospects, government debt, demographics, inflation and monetary policy) or the valuation levels of individual countries and financial markets have become insignificant. On the contrary: if you look at equity valuations, Emerging Markets are trading at significant discounts (so they are much cheaper) than many developed equity markets.
However, these valuation discounts can only partly be explained by different sector compositions or higher risks and actually mean more attractive investment opportunities in the long-term. Moreover, valuations in the USA (as the world's dominant developed equity market) are not only significantly higher, but are also often based on extremely high profit margins, which in some cases are well above historical averages. If these profit margins were to return to their average levels, the corresponding equities would be even more expensive. The exact opposite is true in many (though not all) Emerging Markets: Relatively lower valuation levels are often accompanied by below-average profit margins. A return of these margins to long-term average levels would make the valuations of the corresponding equities even cheaper and thus more attractive.
This constellation results in significant outperformance potential for Emerging Market equities compared to many developed markets. Whether this potential will actually be (fully) realised in the coming years and translate into correspondingly above-average returns for investors cannot be guaranteed but remains to be seen. And once again, it must be emphasised that the higher earnings potential is also accompanied by higher risks. Emerging market equity funds still generally have a higher fluctuation margin, and capital losses cannot be ruled out.
Sustainability in Emerging Markets
The trend towards more sustainable, responsible business practices also offers considerable potential in the Emerging Markets. Whether climate and environmental protection, better social standards, less corruption and more transparent corporate governance – a lot of positive things have already happened in these areas and a lot more could happen in the coming decades. Nevertheless, many investors hardly associate the topic of sustainability with Emerging Markets. Yet the rewards here are "double":
Firstly, the earnings potential that can be realised by many companies through more responsible business practices (such as fewer reputational risks, occupational accidents, breaches of the law, happier, healthier, more productive employees, more shareholder-friendly corporate policies, etc.).
Secondly, the opportunity to promote the trend towards greater sustainability with your own investment.
The fund
Sustainable investing requires specialised expertise and good, proven analysis and selection processes. Raiffeisen KAG has meticulously developed this expertise and is repeatedly recognised for its
Impact assessment
The impact is calculated annually by Raiffeisen KAG.* The data shown relates to the companies in the Raiffeisen-Nachhaltigkeit-EmergingMarkets-Aktien compared with the market as a whole. Source: Raiffeisen KAG, data as at 28 June 2024.
*In order to calculate the effect of sustainable equity investments in the fund, we used the sustainability ratios of the companies found in their sustainability reporting. CO2 emissions are generally denoted in tons of carbon dioxide equivalents (CO2e), work accidents in lost-time-injury-rate, waste in tons and water consumption in m3. The key ratios for the individual companies were multiplied by their weight in the fund or in the overall market, and the results of each key ratio were compared. Currently, we do not calculate such ratios for the bond segment of the funds, as we think that the "sustainable footprint" is attributable to the company owners, i.e. shareholders, not to the creditors, i.e. bond holders.
How are sustainability criteria assesses?
A sustainability analysis can be thought of as another magnifying glass that provides new insights into a company. By integrating sustainability criteria, certain risks can be assessed better. One example is the assessment of corporate governance criteria, which also includes the risk of corruption. The most important analysis factor for us in terms of sustainability is the Raiffeisen ESG Indicator*, which is calculated on the one hand on the basis of purchased data and sustainability analyses from renowned rating agencies. On the other hand, we draw on the expertise of the local Raiffeisen network in order to make an independent, final assessment with regard to sustainability.
*) Raiffeisen Kapitalanlage-Gesellschaft m.b.H. continuously analyses companies and countries on the basis of internal and external research sources. The results of this sustainability research are combined with an overall ESG assessment, including an ESG risk assessment, to produce the so-called 'Raiffeisen ESG Indicator'. The Raiffeisen ESG Indicator is measured on a scale of 0 to 100. The assessment takes into account the respective corporate sector
Examples
At the end of this labour-intensive selection process, for example, 70 to 90 equities are selected for the fund Raiffeisen-Nachhaltigkeit-EmergingMarkets-Aktien. A look at the regional structure of the fund shows that countries in Asia – above all China and Taiwan – currently hold the highest priority. A large Taiwanese microchip manufacturer, for example, is particularly keen on recycling and the reprocessing of water. Many Western companies could also take a leaf out of its book when it comes to sustainability standards. India's largest IT and outsourcing company, on the other hand, pays great attention to the further training of its employees and also offers women the opportunity to work part-time after maternity leave. This is still largely unusual in this country.
 "Nachhaltigkeit-EmergingMarkets-Aktien")
The Raiffeisen-Nachhaltigkeit-EmergingMarkets-Aktien exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.