Fidelity Emerging Markets 27 December 2023
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Fidelity Emerging Markets. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Fidelity Emerging Markets Limited (FEML) benefits from the experience of portfolio managers Nick Price and Chris Tennant, who have been investing in emerging markets for most of their respective careers. Through the FEML portfolio they take a go-anywhere approach within the emerging markets space, looking for on- and off-benchmark stocks across each sector, market cap and geography, including frontier markets - these are all fair game. They can also use derivatives to go long or short.
Nick and Chris point out that emerging-market businesses are currently sitting at attractive valuations versus history, as well as relative to their developed market counterparts. At present the managers argue there are opportunities across emerging markets, including Mexico, which is set to benefit from nearshoring, and in China, where many high-quality stocks have disproportionately derated (see Portfolio section). In 2023 the managers have been building higher conviction positions, given the valuations and the opportunity set they see, remaining disciplined in their process while doing so. They continue to identify, in their view, best-in-class emerging-market businesses, as well as make use of a broad set of tools, such as the ability to take out short positions, to help generate multiple sources of returns.
At the time of writing, FEML trades at a discount of 11.7% and the board has unveiled a package of measures aimed at narrowing it (see Discount).
We think FEML is a good way to access emerging markets and is well suited to provide diversification to a broader portfolio focused on developed markets. Its flexibility to take out both short and long positions is unmatched in the AIC Emerging Markets sector, making FEML a highly differentiated proposition versus others. The experienced managers who are well versed in the complexities of emerging markets, along with a team of emerging market analysts, gives it an edge when it comes to stock selection, in our opinion (see Management section). Given FEML’s Discount, we think it may be at an attractive entry point for long-term investors who want exposure to emerging markets. The board is active in its efforts to narrow the discount, which, if coupled with good performance, could generate powerful returns for investors.
The managers think that emerging markets are currently full of opportunities, propelled by long-term structural drivers and historically low valuations. They see opportunities in multiple regions, including in Latin America, given the proactivity of many governments when raising interest rates to combat inflation, and also the potential benefits of ‘nearshoring’ for economies like Mexico. Smaller, less well-covered regions are also throwing up opportunities in the small- and mid-cap space, including in Vietnam and emerging eastern Europe.
Bull
- Deep resources and an on-the-ground research team is an advantage with stock selection
- An attractive discount versus history and peers, with the board active in seeking to narrow it
- Extensive resources on the long and short side, including highly experienced managers
Bear
- Poor economic news could lead to weaker appetite for emerging market equities and could weigh on the discount in the near term
- Political risks remain high in many key emerging markets, such as China
- A highly active approach can lead to underperformance when positions don’t work
Fund History
