Fidelity Emerging Markets Trust - beneficiary of the weak dollar

The uncertainty created by President Trump’s economic policies is having a significant impact on the markets, including the foreign exchanges, where the US dollar recently hit a three year low. One of the main beneficiaries of this is the emerging markets, as it reduces the import price inflation, thereby allowing the central banks to cut interest rates to stimulate growth.

If the trend continues it could help to support the performance of the funds operating in the sector, with a prime example being the Fidelity Emerging Markets Trust. It is actively managed with no reference to the benchmark and is unusual, as it can go both ‘long’ and ‘short’ to profit from price movements in either direction. Holding a ‘long’ position means buying a security with the expectation that it will rise in value. A ‘short’ position is the complete opposite and is where an investor borrows shares and then immediately sells them in the hope that they can buy them back later at a lower price.

Approach

The portfolio reflects the best ideas from across the region, with the stock selection decisions being driven by the fundamentals. Managers Nick Price and Chris Tennant look for good quality companies that offer consistent returns and that are trading at a reasonable valuation.

Tennant believes that a highly active approach to investing in emerging markets is essential and says that although there are risks, the portfolio’s enhanced long/short toolkit is important.

“On the long side, we continue to prioritise high return, well-capitalised companies that are returning cash to shareholders – quality attributes that should offer resilience. On the short side, we find opportunities by actively targeting structurally challenged businesses, supporting our ability to benefit from both the winners and the losers across the emerging market universe.”¹

What are the managers’ latest views?

The ability to go both long and short could potentially enable the fund to take advantage of market volatility, such as that caused by President Trump’s tariff announcements.

Tennant says that the weaker US dollar has been an important driver for emerging markets this year, but is keen to point out that it is not the only one.

“Some easing of trade tensions, renewed focus on technological innovation, and relatively cheap valuations are amongst other reasons emerging markets have outstripped the MSCI World index so far this year.”

The underlying portfolio

The portfolio is constructed from the bottom-up stock selection decisions and at the end of May was 23.1% overweight in favour of smaller companies (worth less than £5bn) compared to the MSCI Emerging Markets Index. The main sector overweights relative to the benchmark were Financials and Consumer Discretionary, with South Africa being the biggest active country bet².

“From a geographic perspective, the strategy has established overweight positions in Indonesia, which offers similar demographic advantages to India but at substantially more attractive valuations. We are also overweight Mexico, which is positioned to benefit from near-shoring trends and is trading at decade-low multiples,” adds Tennant.

Performance, dividends and discount

Over the three years to the end of May the trust generated share price cumulative growth of 19.9%, which was well ahead of the 8.7% produced by the index³. It is currently yielding 1.81%. Please note this yield is not guaranteed.

Like many other investment trusts, Fidelity Emerging Markets is currently trading at a wide discount to net asset value of 10%. This compares to an average discount over the last 12 months of 11.6%.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing, please read the relevant key information document which contains important information about each investment trust. The shares in Fidelity Emerging Markets 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. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. 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. Select 50 is not a personal recommendation to buy or sell a fund. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. 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.