Fidelity Emerging Markets Limited

AFTER a decade of underperformance relative to the technology-fuelled US stock market, many investors are wondering whether now might be the moment to reconsider investing in emerging markets.

The long-term case for investing in parts of the world with attractive demographics and economic growth potential is boosted today by relatively attractive valuations. 

Investors can gain an exposure to emerging markets in a number of ways, including actively managed funds and cheap index trackers. One vehicle that is particularly well suited to this asset class is the investment trust and one of these that we believe stands out from its peers is Fidelity Emerging Markets Limited (FEML).

Why emerging markets?

The case for emerging markets is strong. Developing countries account for 70% of the world’s population, 40% of its economic output and 60% of its growth. The low hanging fruit of moving huge populations from rural subsistence to urban consumption is now largely in the past, but the transition from low to middle and higher incomes is ongoing and offers enormous investment opportunities in companies that meet the needs of a rapidly expanding middle class.

In the shorter term, relatively attractive demographics, more robust current accounts, lower borrowings and less worrying inflation argue for a higher weighting to emerging markets, especially as exposure to these can be achieved at much lower relative valuations than in the past.

Why Fidelity?

Fidelity’s focus on active management, with an extensive team of analysts and portfolio managers with boots on the ground in the developing world, gives it an edge when it comes to emerging market investing. Having nearly 500 investment professionals around the world, Fidelity conducts roughly 16,000 company meetings a year - one every eight minutes or so. The research team engages with company management, competitors, suppliers and customers to get a 360-degree view of a business.

Why FEML?

What makes Fidelity Emerging Markets Limited different from its competitors, however, is its unique investment toolkit. Some of this is a consequence of its investment company structure. FEML can, for example, use its borrowing powers to invest more in high conviction positions, making every pound of shareholders’ money work harder. It can also invest in unlisted and smaller companies without the liquidity concerns facing an open-ended investment fund.

Another key feature of FEML is its ability to capitalise on failing as well as successful companies. The ability to short stocks (to benefit from a falling share price) enables simple negative positions to be taken in a weak company or so-called pairs trades in which a long position is taken in a strong company and a corresponding short position in a weaker counterpart.

Why now?

The emergence of China from its long Covid hibernation provides a tailwind for companies in the world’s biggest emerging market and will have a positive knock-on impact throughout the investment class. At the same time, the developed world faces a likely economic slowdown after a rapid rise in interest rates over the past year or so.

Despite this relative advantage, the valuations of emerging market shares remain attractive compared with their developed world counterparts, US shares in particular.

At the same time, FEML’s shares currently trade at a significant discount, of almost 15%, to the value of its underlying assets. Historically, a discount of this scale tends to narrow over time, which has the potential to magnify investors’ returns over and above any growth achieved from rising valuations and good stock picking.

More on Fidelity Emerging Markets Limited (FEML)

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. The shares in the Fidelity Emerging Markets Limited investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.