Why this revamped emerging markets trust stables at 15% discount
By Godwin Anyebe
The value of investments and the income from them can go down as well as up, so you may get back less than you invest.
For some investors the emerging markets can feel like a step too far out of their comfort zone, but it might be an area worth reconsidering, as the region currently benefits from a supportive macro-economic environment and compelling valuations. Anyone who is interested might want to have a look at Fidelity Emerging Markets Limited, which has just released its annual accounts to the end of June.
Many Western economies are struggling to deal with the highest levels of inflation and interest rates in nearly a generation, yet in most emerging markets the picture is completely different. The majority of these countries have already experienced the peak in the cycle and are likely to start cutting rates this year in response to easing inflationary pressures.1
Fidelity only took over the management of this investment trust in October 2021 and their unique approach is just starting to feed through into positive performance. It is the same process that is used in the open-ended Fidelity Active Strategy (FAST) Emerging Markets Fund that has outperformed its benchmark in 7 of the last 10 discrete years to 30 June 2023, in most cases significantly.2 Please remember past performance is not a reliable indicator of future returns.
Managers Nick Price and Chris Tennant are free to invest anywhere in the emerging and frontier markets including in the small cap end of the spectrum and use the firm’s extensive research team to identify high-quality companies with good growth prospects and attractive valuations. They can also short sell the weakest stocks to profit from falling prices and take geared positions to boost the potential returns.
Tennant believes that companies in the region are at record cheap valuations, their lowest versus developed markets since 2002. He has recently outlined the five key themes that make emerging market equities such a compelling asset class at this point in time.
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One area they are excited about is copper, which is a transition metal that will help power the low carbon economy, yet is likely to experience a significant shortfall in supply, hence their investment in copper producers based in Mexico and Peru. They also like the demographics in India where they are looking to take advantage of the growing penetration of consumer finance in the country.
Price says that the emerging markets index is as cheap as it has ever been and is trading at multi-decade lows relative to its developed peers. He thinks that the extent of the discount is at odds with the improving fundamental picture, not least because inflation has seemingly peaked and interest rates are set to start coming down.
“Given that emerging market equities have underperformed over more than a decade now, valuations are very attractive and appear out of sync with what I think is an increasingly positive fundamental backdrop for many companies.”
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