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The year 2023 turned out to be fairly pedestrian in terms of emerging markets’ performance. The asset class was weighed down by China, which recorded its third consecutive year of negative returns.

Over the past few years, global emerging market (GEM) investors have dealt with a series of challenges, including a surging pandemic, local lockdowns and widespread travel restrictions.

Albert Einstein famously said, “Not everything that can be counted counts and not everything that counts can be counted.” This holds true in many situations, but we think it is especially true when it comes to risk management.

Since we last wrote, roughly three months ago, investors in emerging markets have had to reconcile themselves to a stream of disappointing headlines from several key countries.

Mutations, it would seem, are not unique to the virus. Starting with some housekeeping, we always end our letters seeking feedback from our regular readers.

In almost every meeting that we have with management teams, we will ask about incentivisation. In our view, it is an important question and the answer can be highly revealing about an organisation’s culture and behaviour.

How did last year play out for the Global Emerging Markets and what are the opportunities for the road ahead?

Since our last update, global markets have not been short of action and the manic behaviour characterising today’s markets has taken investors on another rollercoaster ride.

At FSSA Investment Managers, we believe that meeting management teams is crucial in assessing the quality of a company.

I started my career more than 18 years ago as a developed markets consumer analyst. It was a great introduction to investing – the consumer sector is extremely broad so I was able to gain experience across many sub-industries and look at a wide variety of companies.

As long-term, bottom-up investors, our starting point for finding suitable investments is to seek out companies that benefit from structural tailwinds and have clearly-defined competitive advantages.

Concerns about high inflation, rising interest rates and the growing probability of a recession in major developed markets are starting to weigh on investor sentiment. However, we are confident in the ability of our portfolio holdings to navigate a US recession, as they have done in the past.

Five years ago we launched the FSSA Global Emerging Markets Focus strategy. It has been an interesting time to invest in emerging markets.

Penetration rates for goods and services are low and the high level of informality in emerging market countries often raises the barriers to entry substantially.

FSSA Global Emerging Markets strategies cover developing and frontier markets companies and are biased towards mid-cap companies that have the potential to grow much larger over time.

FSSA Investment Managers has been investing in Asia and global emerging markets for three decades. We are conservative investors, and resilience during market sell-offs has underpinned our long-term performance.

As investors focused on quality, one can easily “fall in love” with an investment and be too forgiving in certain situations, potentially missing important warning signs or sell signals. One question that we frequently get relates to a common behavioural bias for quality investors: how do we balance admiration for a company without becoming too complacent?

One of the true competitive advantages we believe we have at FSSA is a genuine long-term investment horizon. For us, investing is not about trying to predict which stocks will rise or fall next month or quarter; rather, it is a non-speculative activity aimed at participating in the long-term value creation we believe the best companies can generate.

Investment strategy updates and insights from FSSA Investment Managers' leading investment experts.

Market volatility has been a feature of Asian and GEM markets for quite some time. The reasons are well known and range from global issues such as the pandemic to region-specific events such as Evergrande and concerns around the Chinese property market.

Our investment strategies cover regional and single country portfolios across the universe of small-, mid- and large-cap stocks, including Asia Pacific, Global Emerging Markets, Greater China Region, China A-Shares, India and Japan.

At FSSA, we are long-term, bottom-up investors with a focus on quality. This mind-set also applies to how we engage with companies on Environmental, Social and Governance (ESG) matters.