Is it a good time for investors to raise their exposure to emerging markets?

As we entered 2022, many would never have imagined the tragic events that would unfold. Russia’s invasion of Ukraine has unsurprisingly rocked markets on a global scale, as Western leaders have imposed heavy economic sanctions on Russia.

The MSCI Emerging Markets Index sold off sharply after the invasion, and while the bourse has since recovered some earlier losses, it remains down 5 percent since the start of the year.

While those markets closely linked to Russia or Ukraine have sold off the most, we have seen widespread falls across stocks in emerging nations, regardless of fundamentals. The asset class as a whole is now looking particularly cheap, both relative to history and compared to other stock markets.

Given the breadth of the emerging market investment universe, and the fact that these countries sometimes face more political, economic or structural challenges than developed countries, an active approach is especially important.

An active approach can mitigate some of the key risks associated with this asset class, while also accessing the great investment opportunities — or, super-compounders — available in less risky countries and sectors.

As oil, gas and commodity prices have surged, energy and commodity exporters have performed particularly well in the year to date, while importers have generally suffered and remain under pressure.

Commodities and oil companies are classed as cyclicals, meaning they are price takers, and their profitability depends on underlying prevailing commodity prices. We instead prefer to focus on quality, growth companies, which can be price makers, with more control over the destiny of their business.

Adding to that, environmental, social and governance factors have been a key component of our fundamental analysis for many years, predicated on our belief that company culture is extremely important for long-term profitability.

In line with the global move toward a low carbon economy, we also expect invested companies to align with or be signatories to the UN global compact principles on corporate sustainability — moving away from companies whose main business activity is linked to fossil fuels, as well as all military spending and tobacco.

Russia on the slide

This is also one of the reasons why we’ve chosen to avoid investing in Russia for several years — it has always been a commodity-heavy market that is largely correlated to the medium-term oil price.

Furthermore, for some time we have been cognizant of the significant political and governance risks associated with investing in Russia. We chose to exit our remaining position in the country following the Salisbury Novichok poisonings in the UK in 2018, for which Russia was held responsible by most of the international community.

India's strong investment case

On a country level, We think India has a great long-term investment case, and its gross domestic product growth outlook is very strong, with the government forecasting growth of 9.2 percent this fiscal year and between 8 percent and 8.5 percent the following year. This accelerating growth story is reflected in rising company earnings forecasts, with India looking set to record the second-highest earnings growth in Asia this year.

The ongoing conflict in Ukraine does not directly impact India, though we do note it could have an indirect effect in terms of higher inflation due to rising energy prices.

However, India’s economy is far less sensitive to oil prices than it used to be, due to the growth of export industries over the past decade, which provide hard currency cash inflows to cover the cost of imported energy. Furthermore, India has held up relatively well in the face of the conflict, in part because a growing domestic investor base supports its market, making it less volatile than in the past. There is plenty of scope for this trend to continue, given the significant levels of savings held by Indian households, of which only 5 percent is directed toward the stock market.

China's COVID-19 problem

China was one of the most unloved equity markets in 2021, and it has continued to underperform so far this year.

But we believe the backdrop in China is improving, with several reasons to be more positive. In terms of the most recent developments, we were encouraged to see Chinese policymakers reinforcing their commitment to achieving its 5.5 percent GDP growth target. This means that policies around regulation and zero-tolerance toward COVID-19 pandemic are starting to be relaxed somewhat, as policymakers move to prioritize economic growth. Although we are aware that its biggest city Shanghai is in the middle of a strict lockdown. Monetary policy is becoming more accommodative, and we expect to see further fiscal stimulus, along with other supportive measures for consumers.

While investors must remain aware of the risks that can come with emerging market investing, incorporating ESG factors into our fundamental research process has allowed us to successfully mitigate some of these risks. Emerging markets are home to some truly world-class companies, with the potential to deliver strong returns. These super-compounders are highly profitable, have robust competitive advantages and the ability to reinvest back into their businesses to fund future growth.

• Nick Payne, head of strategy, global emerging markets and Oliver Lee, investment director, who are both at Jupiter Asset Management.