Important information: 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.

Source: Yahoo Finance from 23.10.18 to 20.10.23 Basis: Share price in GBP. Excludes initial charge. 

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.

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.”  

Many investment trusts are currently available at double digit discounts and Fidelity Emerging Markets Limited is no exception, with the shares trading around 15% below their net asset value. Some may see this as fair value, others as a buying opportunity. It's worth remembering emerging markets carries a greater amount of risk and volatility than more developed markets which investors should bear in mind before considering more exposure to this region.

More on Fidelity Emerging Markets Limited.
 

Five-year performance table 

(%) As at 25 Oct 

2018-2019 

2019-2020 

2020-2021 

2021-2022 

2022-2023 

Fidelity Emerging Markets Ltd 

23.8 

8.9 

4.4 

-31.5 

5.1 

Past performance is not a reliable indicator of future returns

Source: FE, as at 25.10.23 Basis: Total returns in GBP. Excludes initial charge.

Source:

1,2 Fidelity Emerging Markets Ltd Annual Financial Report, 13.10.23 

Important information: The value of investments can go down as well as up and investors may not get back the amount invested. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. The use of financial derivative instruments for investment purposes, may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Investors should note that the views expressed may no longer be current and may have already been acted upon. The shares in this investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. Investment trusts can gain additional exposure to the market, known as gearing, potentially increasing volatility. 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.

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