Fidelity Emerging Markets 23 August 2024

Managed by Nick Price and Chris Tennant, both seasoned emerging market investors, Fidelity Emerging Markets Limited (FEML) benefits from their extensive experience and intimate knowledge of the companies and management teams within the sector. The managers are afforded a full set of tools with which to create a highly active investment proposition with high alpha-generating potential. They employ a go-anywhere approach within emerging markets, and can also invest into frontier markets and make use of derivatives in multiple ways, most importantly to take up short positions in companies (see Portfolio).

Over the last 12 months to the end of July, the managers’ stock selection within FEML’s short book has been a key driver of performance. Notable contributions came from shorts in an Asian utility company and an Asian battery maker. On the long book side, a variety of different stocks have also contributed to returns, including Kazakhstan’s Kaspi, which has a very strong market position across a number of categories including e-commerce and payments. TSMC’s share price climbed due to rising demand for semiconductor chips, and MakeMyTrip.com, an Indian online travel agency, rallied due to the recovery in international travel (see Performance).

FEML’s Discount has narrowed over the last 12 months, thanks to proactive measures by the board, including a robust buyback programme and a completed tender offer, along with improved performance. At the time of writing, FEML trades at a 11.8% discount, in line with its five-year average.

FEML’s managers believe emerging markets are currently ripe with opportunities, propelled by long-term structural drivers and historically low valuations. They see opportunities across the sector, optimistic about countries like Poland, which they visited earlier this year, and Vietnam and Mexico, which they see as beneficiaries from the ‘friendshoring and nearshoring’ trend as businesses seek alternatives to China.

Whilst rates will likely remain structurally higher than they have done historically, the likelihood that rates have peaked mean they own a well-diversified list of financials companies that are not rate sensitive, for example those in the fintech space, as well as those poised to rally from falling rates, such as OTP Bank in Hungary.

A key strength of FEML, in our opinion, is its differentiated strategy, particularly its flexibility to take out both short and long positions, something that’s unmatched in the AIC Emerging Markets sector. We think this flexibility is particularly valuable in the current environment, where higher rates and therefore the higher debt costs are likely to increase pressure on weaker companies. By shorting these vulnerable companies, FEML can generate genuinely differentiated sources of alpha, making it less dependent on market direction for returns.

Overall, FEML presents a highly differentiated investment proposition. Whilst it has faced some challenges, notably in 2022, the experience of its seasoned managers and the proven success of the managers’ strategy over the long run make it a compelling option for investors seeking emerging market exposure. Even with a Discount in line with its five-year average, FEML remains attractive, in our view, particularly if its performance remains strong and the board continues its proactive approach, which could see the discount narrow further.