With hindsight, many investors were over-pessimistic over the course of the brutal sell-off in 2008 as well as early 2009, and also underestimated the power of emerging economies, especially China, thereby missing the rebound since the second quarter of 2009. Global equity market ended the year with stellar returns – the average fund in the Morningstar Global Large-cap Blend Equity and Morningstar Global Small/Mid-Cap Equity rose 31.15% and 39.98% respectively. Global equities primarily shone on stronger-than-expected recovery and less-than-expected missteps made by central banks around the global, though some would argue that it’s too early to conclude.
The turnaround in U.S. equity market last year is impressive, but funds in the Morningstar U.S. Large-cap Blend Equity and the Morningstar U.S. Small-cap Equity registered gains of 27.82% and 35.19% respectively, slightly underperforming global equity funds. This underperformance is no surprise to investors as many global equity funds nowadays have exposures to emerging market plays, which in general outperformed U.S. equities in 2009. For instance, the average fund in the Morningstar Global Large-cap Growth Equity has 4.37% of the total assets invested in Chinese equities.
In 2009, emerging markets led the run. The average fund in the Morningstar Russia Equity category and the Morningstar Brazil Equity rose 139.10% and 133.07% respectively. There is little doubt that many investors are gaining interests to the emerging world nowadays, as the western world is at a big risk of losing steam. Brazil, for example, rode out the recession much earlier than developed countries while the inflation is also subdued. One of the most pleasing aspects of Brazil is its growth prospect. While U.S. and U.K are still struggling to find new growth momentum, Brazil sits on rich natural resources and will host two biggest sport events – Olympic Game and World Cup – in the coming years. Indeed, this eye-catching growth is not without risk. Emerging countries have to think about cooling down the sizzling economies without hurting the fundamental.
Asian equity markets were spurred in 2009 by the market’s expectation of robust and synchronised recovery. For the year, the average fund in the Morningstar Asia-Pacific ex-Japan equity category and the Morningstar Asia-Pacific with Japan equity category rose 68.66% and 39.29%, good in both absolute and relative terms. Japanese equities ended the year with underperformance and it dragged the performance of Asian-Pacific with Japan equity funds, and thus funds with less exposure to Japanese equities are rewarded. Equities in higher risk sectors continued to gain. Asia-Pacific ex-Japan equity funds with more exposures to cyclicals and small-cap stocks remained outperformers. Among the 10 Morningstar single country equity categories in the Asia region, India equity funds, Taiwan Small/Mid-cap equity funds and Singapore equity funds proved strongest, whilst Japan equity funds (both large-cap and small/mid-cap focused funds) lagged. However, stretching to three- and five-year performance, China equity funds are clear outperformers.
The performance of China equity funds last year was largely in line with the average Asian Pacific ex-Japan equity funds. For China equity funds, two intriguing trends emerged in 2009: First, many portfolio managers started underweighting telecoms given keen competition and policy uncertainties facing companies in the sector. China Mobile, the market leader in the Chinese telecom industry and a key benchmark constituent, is one of the largest underperformers during the year. The top performers in the Morningstar China equity category even had nearly zero exposure to Telecoms. Second, Morningstar performance attribution suggests that sector allocation played a more important role nowadays in Chinese equity portfolios as compared with five years ago. For the year, the average fund in the Morningstar China equity category rose 70.64%.
Taiwan equities funds proved a beneficiary of the global recovery theme. Taiwanese equities funds are tech-heavy by nature (the average Taiwan large-cap equity fund devotes 50% of its assets to tech stocks, and for Taiwan small/mid-cap equity funds, the figure is 60%), and thus they tend to outperform when technology is in favour. Improving relations between China and Taiwan also helped Taiwan equity funds. However, according to Morningstar holdings data, portfolio managers running regionally diversified strategies did not favour Taiwanese equities. In the first eleven months of last year, Asia Pacific ex-Japan equity funds, Asia Pacific with Japan equity funds and Greater China equity funds in general trimmed exposures to Taiwanese equities, although they are outperformers last year. The average fund in the Morningstar Taiwan Large-cap equity category and Taiwan Small/mid-cap equity category rose 77.30% and 81.02% respectively last year.
As for sector equity funds, the surge of gold price, helped by the weak greenback, lifted precious metal equity funds. For the year, the average fund in the Morningstar Sector Equity Precious Metals was up 59.14%. Energy equity funds could also earn appeals from investors given the strong crude price rally. Investors should be aware that crude oil price has higher correlation with the global economic growth nowadays. Therefore, if the global recovery is less resilient than many expected, crude oil price as well as related fund offerings will suffer.
